ORDER
D.C. Agrawal, Accountant Member
1. This is an appeal filed by the assessee raising the following grounds:
1. BECAUSE the learned CIT (Appeals) has filed to appreciate and give due consideration to the following: –
(a) the “reasons recorded” (so called) did not constitute the requisite material for initiating (he proceedings under Section 147;
(b) notice under Section 148 had not been validly issued and served in accordance with the provisions of law;
(c) in any case, there was a disharmony between the “reasons recorded” and enquiries made during the course of proceedings under Section 147;
(d) the assessment order as had been impugned before her was not in the name of the “person” in whose case the proceedings under Section 147 had been initiated; while upholding the, validity of initiation of proceedings under Section 147.
2. BECAUSE the alleged information that has been referred to by the learned CIT (Appeals), in para 2 of the appellate order, was available with the Assessing Officer in the form of audited statement of account as well as Tax Audit report under Section 44 AB, at the time of processing the return and no discrepancy having been found in such information (at the time of initiation of action under Section 147) the action under Section 147 is bad in law.
3. BECAUSE in any case, non-issuance of notice under Section 143(2), after the appellant had filed the return in compliance with the notice under Section 148, was fatal to the very survival of the assessment order as was impugned before her and the learned CIT(Appeals) has erred in law and on fads in holding that sufficient opportunity of hearing having been given to the appellant otherwise, there was no requirement in law to issue notice under Section 143(2).
4.1 BECAUSE the learned CIT (Appeals) had erred in law and on facts in upholding the addition of Rs. 63,100/- as had been made in the assessment order, on the ground that the sources of corresponding credit remained unexplained.
4.2 BECAUSE the appellant had duly discharged his onus of proving the nature and source of the credits in question and merely because the appellant was not in a position to produce the persons concerned in the short time available to him, it could not hove been said that the “credits” represented “undisclosed income” of the appellant, within the meaning of Section 68 of the Act.
5.1 BECAUSE the learned CIT(Appeals) had erred in law and on facts in upholding the following disallowances:-
(a) Rs. 5,000 : out of factory expenses claimed at Rs. 14,007;
(b) Rs. 5,000 : out of office expenses claimed at Rs. 14,3 74;
(c) Rs. 5,000 : out of tour and travels claimed at Rs. 2,82,792;
(d) Rs. 5,000 : out of telephone expenses claimed at Rs. 8, 528;
(e) Rs. 2,000 : out of staff welfare expenses claimed at Rs. 14,800;
(f) Rs. 16.678 : out of advertisement expenses claimed at
Rs. 66,715 (being 1/4th of the total claim);
merely on the ground that there was increase in expenses under aforesaid heads, as compared to the earlier year.
5.2 BECAUSE the expenses claimed under various heads being fully vouched and verifiable, no disallowance was called for either on facts or in law.
5.3 BECAUSE in any case the disallowances so made by the learned Assessing Officer were beyond the scope of proceedings under Section 147 where under it was the sole obligation of the Assessing Officer himself to establish escapement of income on account of wrong claim of expenses under various heads.
6.1 BECAUSE the learned CIT(Appeals) has erred in law and on facts in rejecting the appellant's claim for relief under Section 80IA on the grounds that;
(a) the appellant had not given any detail to show as to how it is entitled to relief under Section 80IA.
(b) such a claim had not been made at the original stage; and
(c) in the proceedings under Section 148, such a claim is not maintainable for the first time.
6.2 BECAUSE all the relevant details were available on records, about the manufacturing activities being carried on by the appellant and the authorities below were under the statutory obligation to consider and allow the said claim, even if the same had not been made at the original stage.
6.3 BECAUSE wholly without prejudice to the contention raised in ground No. 6.1 & 6.2 above, the appellant’s claim for relief under section SOIA was legally maintainable, even if made for the first time in the re-assessment proceedings, as earlier assessment stood wiped off after initiation of proceedings under Section 147.
7. BECAUSE the appellant disputes levy of interest under various heads.
8. BECAUSE the order appealed against is contrary to the facts, law and principles of natural justice.
2. The facts of the case are that the assessee is a Proprietory concern of Shri Anil Kumar Gupta, and is engaged in the production of Agarbatti, Dhoop etc. The return for the assessment year 1998-1999 was filed originally on 31.10.1998 showing total income of Rs. 4,38,834/-. The case was processed Under Section 143(1) on 28.07.1999. The A.O. later issued notice Under Section 148 on 18.09.2002, which was served on the assessee on 21.09.2002. In compliance to the said notice, the assessee filed return of income with a note on the top “In response to notice Under Section 148 under protest on 23.12.2002.” The income returned therein was Rs. 4,38,832/- i.e. the originally returned figure. The assessee claimed in this return deduction Under Section 80 IA for Rs. 1,09,708/- thus declaring total income at Rs. 3,29,130/-. The A.O. noted that no certificate in the form 10 CCB was enclosed with the return originally filed on 31.10.1998 but that certificate was enclosed in the return Tiled on 23.12.2002. The A.O. issued notice Under Section 142(1) with a detailed questionnaire on 18.12.2002 i.e. prior to filing of the return on 23.12.2002. The books of account, stock register, vouchers; and invoices were produced and were examined by the A.O. The paper books were furnished before him. The Assessee also furnished chart of turnover, gross profit, gross -profit rate for three years. After scrutinizing the return, the A.O. disallowed the following expenses:
Head of Expenditure Disallowances
by estimate
Wages 15,000
Factory expenses 10,000
Salary 10,000
Office expenses 10,000
Tour and travel 5,000
Telephone exp. for personal use 5,000
Staff Welfare 2,000
Advertisement expenses 20,000
-------------
77,000
-------------
3. The A.O. also noted that the following deposits were not proved within the meaning of Section 68:
Name of depositor Amount
Shri Indra Pal 5,000
R/O Tandauli, G. Ganj, Fzb.
Smt. Chandra Kanta 18,000
Shri Mithlesh Gupta 10,000
S/o Shri Ram Nath Gupta
Vijay Kumar Gupta 700
S/o Luxmi Pd. Gupta
Chandra Dco Pd. 17,000
R/o Katra, Goshaiganj, Fzb.
Om Prakash 5,000
Anil Kr. Maurya 5,000
Shri Sri Nath 2,400
-------------
63,100
-------------
4. According to the A.O., neither the identity nor the capacity and creditworthiness has been established. The confirmations filed did not reveal complete details of income and savings of the creditors to advance loans. As the assessee did not discharge the onus of proving these loans and also did not produce the creditors, even though asked for by him, he added Rs. 63,100/- as credits not proved.
5. Before the ld. CIT(A), the assessee raised the grounds relating to re-opening of assessment contending that re-opening was bad, because the A.O. did not arrive at proper satisfaction, the assessment was sought to be declared bad as the A.O. did not issue notice Under Section 143(2) and on merits, it was submitted before the ld. CIT(A) that adequate lime was not allowed to produce the creditors. The additions on account of disallowance were made on ad-hoc basis, which was not permissible.
6. The ld. CIT (A) upheld the re-opening of the assessment on the ground that reasons for re-opening of the assessment was recorded at the time of initiating proceedings and the A.O. had adequate reasons to believe that the income has escaped assessment. The ld. CIT(A) also rejected the contention that no notice Under Section 143(2) was issued and therefore, the assessment was bad by noting that the assessee had filed the return on 23.12.2002 in response to notice Under Section 148. The assessee has attended on various dates in response to notice Under Section 142(1) and no prejudice is caused to the assessee for alleged non-service of notice Under Section 143(2). The ld. CIT(A) relied on the decision of Hon’ble Gujarat High Court in Praful Chunnilal Patel v. CIT 236 ITR 832 (Guj). On merits the ld. CIT(A) confirmed the addition of cash credits of Rs. 63,100/- on the ground that confirmations filed by the assessee were general in nature and do not establish either the identity of the persons or their creditworthiness. The assessee had also not produced the creditors for examination even the A.O. had asked for. Regarding various disallowances, the ld. CIT(A) gave a relief of Rs. 38,322/- and confirmed the balance of disallowances. Regarding the claim of deduction Under Section 80IA, the ld. CIT(A) observed that action Under Section 148 is taken to assess the escaped income and it does not provide second inning to the assessee.
7. Against this, the ld. A.R. submitted that the A.O. did not provide copy of the reasons on the basis of which assessment was re-opened. The reasons later procured were recorded on the order-sheet and they do not specifically mention any income having escaped from assessment. The reasons recorded are general in nature showing intention of fishing enquiries only. It is well settled principle that there must be material available with the A.O. which could lead to the formation of reasons to believe that any income had escaped assessment. The AO should have referred to such material in the reasons recorded. This is mandatory as per Section 148(2). The material must have nexus with the formation of belief. If the material is irrelevant, then formation of belief would not be legally correct and hence re-opening will not be justified. In the present case, according to the ld. A.R. the reasons do not show that the AO had any material with him. Whatever is mentioned has no relevance with the escapement of income. There is no nexus of any material with the escapement of income. According to the ld. A.R., the A.O. had all the information on record. He mentioned in the reasons that he intends to do deeper scrutiny. According to him, some enquiries are called for, but this is not the requirement of law. The assessment cannot be re-opened without pointing escapement of income. The ld. A.R. relied on the decision of Hon’ble Supreme Court in Chuggamal Rajmal v. S.P. Cheliah 79 ITR-603(SC). Sheonath Singh v. ACIT 82 ITR-147, ITO v. Lakhmani Mewal Das 103 ITR-437, Gangasaran & Sons (P) Ltd. v. ITO 130 ITR -01 (SC), Addl. CIT V. Jai Engineering works Ltd. 113 ITR-389, CIT v. Kelvinator (India) Ltd. 256 ITR 01 (Del) (FB) and Dass Friends Builders (P) Ltd. v. DCIT (Alld.) reported in (2006) 280 ITR 77 for the proposition that reopening of assessment will be bad if there is no nexus of the formation of belief with the material available to the AO.
8. On the question of non-issuance of notice Under Section 143(2), the ld. A.R. submitted that if no notice is issued Under Section 143(2) before completing the assessment Under Section 143(3), then such assessment would be invalid. He relied on the decision of Guwahati High Court in 289 ITR-28 (Bendana Gogoi v. CIT). According to him, issuance of notice Under Section 143(2) is mandatory and only after a valid notice Under Section 143(2) having served on the assessee that AO gets jurisdiction to complete assessment Under Section 143(3). A notice issued Under Section 142(1) cannot be a substitute for a notice Under Section 143(2). In case, no notice Under Section 143(2) is issued and served on the Assessee, the A.O. has no option but to accept the returned income.
9. On merits, the ld. A.R. submitted that all the details about the cash credits were available originally. He referred to page 90 onwards of his paper book showing confirmatory letters and copy of account filed by the creditors which according to the ld, A.R. showed the address of the creditors. There were opening balances in their accounts. Some of them were income tax assessee and some of them had paid money to the assessee by cheque. The ld. A.R. further submitted that the A.O. had asked the assessee to produce the creditors only on 27.12.2002 and the assessment was completed on 31.12.2002 without giving adequate time to the assessee to produce the creditors. It was explained to the AO that it is not possible to produce the creditors within short time, then the AO ought to have given time as assessment could have been completed by 31.3.2004 but it was completed on 31.12.2002. It means that the AO did not want to give time and taking the pretax of assessee’s inability; to produce the creditors in short time, completed the assessment in a hurry. The ld, AR also submitted that Section 68 is not mandatory and uses the word “May”, which means that a discretion is available to the AO whether to make addition Under Section 68 or not. Such discretion has to be used judiciously. The addition is not automatic if the creditors are not produced for some reason or the other.
10. Regarding the disallowances, the ld. AR submitted that assessee’s accounts are audited. The auditors have verified the expenses. No defect/ discrepancy have been pointed out in the books of account, which are evidence of correctness of entries. Without pointing out defect in the books, the AO cannot resort to disallowances. The ld. CIT(A) has also-confirmed part disallowaces without considering the arguments of the assessee.
11. Regarding the claim Under Section 80IA, the ld. AR submitted that the return filed Under Section 148 is at par with the return filed Under Section 139, The assessment once opened Under Section 148 is opened for all purposes, including the claims of deductions not originally made. Thus, deductions can be claimed in the return filed in response to notice Under Section 148.
12. In response to this, the ld, DR. submitted that the A.O. had recorded the reasons and they were provided to the assessee. The reasons show nexus of the re-opening. There is a case or justification for re-opening of the assessment. The A.O. had framed on honest and bonafide belief. He further submitted that sufficiency of reasons can not be challenged. The assessment was originally done Under Section 143(1), therefore, conditions such as true and full disclosures are not required for entertaining the belief for re-opening of the assessment. He relied on the decision of Hon’ble Gujarat High Court in Praful Chunni Lal Patel v. CIT(supra). ITO v. Selected Dalur Band Coal Co. (P) Ltd., 217 ITR-597 (SC), Rattan Gupta v. Union of India 234 ITR-220, CIT v. P. V.S. Beedis (P) Ltd. , Dr. Amin Pathology Laboratory v. JCIT 252 ITR-673 (Bom), Bawa Abhai Singh v. DCIT 253 ITR-83 (Del), Rakesh Agrawal v. ACIT 221 ITR-492 (Del) and Garden Finance Ltd. v. ACIT 268 ITR-48 to support his arguments that the reasons recorded by the AO is sufficient to enable him to re-open the assessment. The reasons had live nexus with the re-opening.
13. Regarding non-issuance of notice Under Section 143(2), the ld. D.R. submitted that notice Under Section 148 was issued on 18.09.2002. The assesses was allowed to file the return within 31 days from the date of service of this notice. The notice was served on the assessee on 21.09.2002. Accordingly, return was required to be filed by 21.10.2002, after expiry of 31 days but the return was filed only on 23.12.2002. Hence the return it beyond the time allowed in the notice Under Section 148(1) and therefore, not a valid return in the eyes of law. Therefore, the AO is not required to take cognizance of such return as it is non-est. He relied on the decision of Special Bench of I.T.A.T. in Raj Kumar Chawla’s case reported in (2005) 94 ITD-01 (SB) for the proposition that Section 143(2) is applicable to a valid return and not to an invalid return. He also relied on the decision of Allahabad Bench of Tribunal in Mohd. Ayub, Fatehpur v. ITO reported in (2004) (4) MTC-817 (Trib). for the same proposition that if the return is filed after time specified in the notice Under Section 148, then the return is non-est. Therefore, question of issuance of notice Under Section 143(2) would not arise and the assessment could not be declared invalid.
14. On merits, the ld. D.R. submitted that the assessee has shown his inability to produce its creditors and therefore, no further time was allowed to the assessee. He relied on various-authorities such as in 140 ITR-151 (Alld) in the case of Nanak Chand Laxman Das v. CIT Bharati (P) Ltd. v. CIT 111 ITR-951(Cal), CIT v. Transport Corporation of India 256 ITR-701 (AT), Goodyear (India) Ltd. v. CIT 246 ITR-116, CIT v. Chandra Vilas Hotel 164 ITR-102 (Guj) and Rama Shanker Gupta v. CWT 275 ITR-628 to support his contention that the assessee has hot been able to establish the identity of the creditor, their creditworthiness and genuineness of the transactions and the assessee has also not produced the creditors in spite of he being specifically asked by the AO.
15. Regarding the claim of the assessee Under Section 80 IA, the ld. D.R, submitted that re-opening of the assessment Under Section 148(1) is for the benefit of Revenue and only the income escaped as originally believe, or subsequently discovered can only be taxed and no further relief than what is originally given to the assessee can be allowed. He relied on the following decisions: 198 ITR-297, CIT v. Sun Engineering. P. Ltd., Chettinad Corporation (P) Ltd. v. CIT 200 ITR-320 (SC), 94 ITD-329 and 103 ITD-309.
16. Regarding the claim Under Section 80 IA, the ld. D.R. submitted that such claim was not made with the original return. The audit report as required Under Section 801A in form No. 10 CCB was not filed originally but filed with the return in response to notice Under Section 148(1). The claim of the assessee fails and for this proposition he relied on the reasoning given by the ld. A.O. and the ld. CIT (A).
17. In response to above contention of the ld. D.R., the ld. A.R. submitted that vide his letter dated 30.12.2002, which is annexed from pages 16 to 27 of his paper book, the assessee wanted much time to produce the creditors, but this time was not given. The assessee had expressed its inability to produce so many creditors in a short time. Regarding the audit report, for the purpose of Section 80IA, the ld. A.R. submitted that such audit report can be submitted at any time before completion of the assessment. On legal issues, the ld. A.R. relied on the decision of the Tribunal in Preet Leasing (P) Ltd., Lucknow v. ACIT in I.T.A. No. 3.52 & 353 decided on 19th July, 2005 for the proportion that notice Under Section l43(2) is mandatory. He also referred to the decision of Third Member, I.T.A.T., in ACIT V.O.P. Chawla in I.T.A. No. 2504/2001 reported in 8 S.O.T.-242 (Del) for the proposition that assessment cannot be re-opened for mere pretence or for an excuse to carry out enquiry into gift received by the assessee without any material or evidence coming into his possession.
18. We have considered the rival submissions and perused the material on record. The assessment was originally completed Under Section 143(l)(a) on 28.07.99. The A.O. thereafter recorded the following reasons to re-open the assessment.
Assessee is a manufacturer, of Agarbattis. In balance sheet, sundry creditors have been shown at Rs. 20,08,279/- unsecured loan of Rs. 2,66,800/- security received from stocks Rs. 73,500/- and security received from staff at Rs. 1,40,000/- No complete address plus confirmation of loan of Rs. 2,66,800/- has been furnished with the return, hence the same is not treated as explained. Complete postal address and security received from stocks advances received from staff and postal addresses of sundry creditors have also not been furnished with the return. Turnover is of Rs. 1,40,23,431/- plus G.P. appears very low. The expenses of sales promotion expenses of Rs. 1,94,555/- …of Rs. 1,84,873/- traveling and Rs. 2,82,792/- appears to be excessive lowering down net profit/net income house hold expenditure is also low. This required deeper scrutiny. I have reasons to believe that taxable income of Rs. 4,06,000/- has escaped assessment. Action Under Section 147 initiated. Issue notice under Section 148.
19. These reasons show that the A.O. examined the original return filed by the assessee and found that in respect of creditor the assessee had not given complete addresses and confirmations of loans, therefore, they could not be treated as explained. The onus Under Section 68 lies on the assessee to establish identity of the creditors, their creditworthiness and also genuineness of transactions. The assessee has shown credits during the financial year. They figure in the balance sheet. Therefore it is the duty/liability of the assessee to enclose with the return the proper evidence and nature and source of such credits. If no such explanation is furnished with the return then the A.O. is bound to believe that those credits are not genuine and therefore, they are deemed income of the assessee within the meaning of Section 68. As the assessment was originally processed Under Section 143(1)(a), the A.O. could not have any occasion to give an opportunity to the assessee to furnish those details on the basis of which he could have satisfied himself that the credits are genuine. Therefore, in absence of any material about the genuineness of the credits annexed with the return, the A.O. has reasonable cause to believe that those credits are not genuine and therefore, income to that extent has escaped assessment. Notwithstanding other part of the reasons recorded about expenditure or gross profit, we are satisfied that the A.O. had adequate belief that the credits are not genuine and therefore, income has escaped assessment. The A.O. was reasonably satisfied that income has escaped assessment and to that extent the formation of belief is proper and within the legal parameters. He has clearly formed the belief that taxable income has escaped assessment. We do not find any infirmity in these reasons and therefore, re-opening of the assessment on that basis is upheld.
20. Both the parties have cited large number of decisions to support their contentions about reopening of assessment, but those decisions are based on peculiar facts of those cases. The gist of decisions in those cases is that (i) There should be some material with the A.O. (ii) That material should be relevant for the purposes of computation of income, (iii) On the basis of that material; the A.O. should have formed the belief. (iv) The belief should be that some income chargeable to tax has escaped assessment. (v) There should be live nexus of the- material with the formation of belief. (vi) Sufficiency of material cannot be questioned. This is beyond the judicial scrutiny. In the present case, we find that assessment has been completed Under Section 143(1 )(a). Therefore the A.O., is not required to show in the reasons that there is a failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment. This is on the basis of Proviso to Section 147 which requires such condition to be fulfilled before reopening of an assessment originally completed Under Section 143(3). For reference Section 147 and its proviso read as under:
147. Income escaping assessment.-If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year):
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.
21. In a case, completed originally Under Section 143(1)(a), the A.O. should have reasons to believe that any income chargeable to tax has escaped assessment. This belief can be formed also on the basis of appraisal of the material already available on the record. It is not necessary that material for formation of belief must flow from outside of the assessment record. It is because there is no occasion to the A.O. to appraise the material submitted by the assessee with return of income which has to be necessarily accepted on the returned income subject to correction of arithmetical errors as mentioned in Section 143(1)(a). There is no occasion to the A.O. to take any view while processing the case under that section. In Aditya & Co. v. CIT return was submitted by that firm showing rental income as business income. Intimation was issued under Section 143(1) accepting the return. Subsequently notice under Section 148 was issued on the ground that income was assessable as income from other sources and that assessee was not a firm. On these facts it was held that:
Held, dismissing the writ petition, that it is on the basis of facts of each case that it has to be decided whether a particular income falls under the head “Business income” or “Income from other sources”. The assessee was only sent an intimation under Section 143(1) of the Act and the question of examination of the material by the Assessing Officer did not arise at that stage. Thus, there was no question of change of opinion. The notice under Section 148 was valid.
22. In Suman Steels v. U.O.I. the facts were that the A.O. recorded the reasons for issue of notice indicating that the assessee had declared a net profit rate below 3 per cent., while the net pr(SIC) rate in the business ranged between 8 per cent. and 10 per cent. On a (SIC) petition contending that there was no rational and intelligible n(SIC) between the reasons recorded and belief it was held that
Held (i) that since the assessment was done under Section 143(1)(a) of the Act and not under Section 143(3) of the Act, there was no occasion for the Department to express any opinion and, therefore, while issuing notice there was no change of opinion involved which called for assessment of reasons.
23. In Pradeep Kumar Har Saran Lal v. A.O. (A, (sic) for the financial year ending March 31, 1989, relevant to the assessment year 1989-90, the petitioner obtained an excise licence in auction purchasing and selling country liquor. He filed a return showing tax(sic) income at Rs. 63,900. The Assessing Officer assessed the taxable income at Rs. 7,87.789 instead, making an addition of Rs. 7,23,889 after making adjustments under Section 143(l)(a) of the Act. As per the adjustments explanatory sheet, appended to the intimation, the Assessing Of(sic) r recomputed the taxable income at the rate of 40 per cent of the purchase price applying the provisions of Section 44AC, discarding the profits as worked out by the petitioner having recourse to Sections 28 to 43C. An application for rectification was rejected and on appeal, the Commissioner of Income-tax (Appeals) held that the Assessing Officer was not justified in applying the provisions of Section 44AC while sending intimation in terms of Section 143(1)(a). The appellate authority thus ordered the detention of the addition of Rs. 7,23,889. The Assessing Officer then issued a notice under Section 148, On a writ petition against the notice it was held that:
The only requirement of Section 147 is that Assessing Officer must have good reason to believe that some income had escaped assessment. One this belief is well-founded, recourse to reassessment proceedings cannot be said to be illegal. So long as the ingredients of Section 147 are fulfilled, the Assessing Officer is free to initiate reassessment proceedings and failure to take steps under Section 143(2) will not render the Assessing Officer powerless to initiate the reassessment proceedings.
24. The power to carry out arithmetical corrections in an assessment/intimation do not include taking any view as to whether conditions laid down Under Section 68 have been satisfied. It would be useful to refer to Section 68 in this regard.
68. Cash credits.–Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
25. This provision is applicable to both summary as well as scrutiny assessments. Once there are credits in the books of the assessee and they are reflected in (he balance sheet filed with the return then onus is on the assessee to prove the nature and source of such credits. The necessity of discharging onus docs not arise only in scrutiny assessments. It is automatic if there are credits reflected in the balance sheet presumably prepared on the basis of the books of accounts. The word “found” appearing in Section 68 does not reflect an overt action on the part of the A.O. to discover the credits in the books. To say that unless case is scrutinized Under Section 143(2), the A.O. could not have found the credits and hence onus could not be fixed on the assessee to discharge and therefore prior to making a scrutiny assessment assessee is not required to prove the nature and source of the credits is legally not correct. Section 68 does not say that nature and source of credits have to be proved only in scrutiny assessment. If there are credits reflected in the balance sheet filed with the return and no explanation or satisfactory explanation as to the nature and source is filed along with the return indicting identity of the creditors and their credit worthiness, then the A.O. will have basis to believe that those credits are deemed income of the assessee within the meaning of Section 68. It would be a different matter if those credits are explained subsequently during scrutiny assessment. Thus in absence of documents showing an explanation or a satisfactory explanation filed with the return about the cash credits appearing in the balance sheet and the return having been accepted Under Section 143(1) the A.O. will have reasons to believe that deemed income chargeable to tax Under Section 68 has escaped assessment.
26. Regarding second issue that notice Under Section 143(2) was not issued by the A.O. and therefore, assessment is invalid, we are of the considered view that the return filed by the assessee in response to notice Under Section 148 was beyond the time prescribed by the A.O. in the notice, therefore, such return cannot be treated as a valid return. We are supported in our view by the decision of Hon’ble Allahabad High Court in Parvati Devi v. CIT 1970, 75 ITR-625, (Alld) of Hon’ble Punjab & Haryana High Court in Auto Metal Engineers v. Union of India and also the decision in R.K. Chawla’s case and Mohd. Ayub’s case as referred to by the ld. D.R.
27. On validity of a return filed after due date the head notes from the decision in Parvati Devi’s case (supra) are as under:
The petitioner filed a voluntary return of her income for 1953-54 on February 28, 1966, on the basis of which the officer passed an assessment order on April 1, 1966, and raised the consequential demand for tax. A revision petition against the. said order of assessment was dismissed by the Commissioner of Income-tax. The petitioner thereupon filed writ petitions challenging the validity of the order of the officer dated April 1, 1966, the order of the Commissioner and the notice of demand on the ground that the assessment was barred by time. The High Court upheld this contention on the ground that the voluntary return, not having been filed within a period of four years as provided in Section 139(4), there was no valid return, which could support the assessment order even under Section 153(1)(c). The fact that the petitioner had agreed to filed a voluntary return as a result of a compromise did not bar her contention that the return filed was barred by time.
28. On the same issue head notes from decision of the Hon’ble Punjab & Haryana High Court in Auto Metal Engineers v. Union of India are as under:
The last date for furnishing the return for the assessment year 1972-73 was July 31, 1972. The Income-tax Officer was competent to extend the time for furnishing the return up to March 31, 1975. The assessee filed the return only on May 12, 1975. The Income-tax Officer ignored that return and issued notice to the assessee under Sections 147(a)/148 of the Income-tax Act, 1961. The assessee filed a writ petition challenging the notice on the grounds, inter alia, that (i) the return had already been filed and was pending; (ii) that the assessment for 1972-73 and become time-barred; and (iii) that the Income-tax Officer had no material with him to entertain the necessary belief that the income of the petitioner chargeable to income-tax had escaped assessment:
Held, that the extensions of; time granted by the Income-tax Officer up to April, 30, 1973, were given under the proviso to Section 139(1) of the Act and could not be treated as notices issued under Section 139(2) of the Act. Those two letters did not also contain a direction, as required by Section 139(2), that the return should be furnished within thirty days of the service of the notice. The return finally filed by the assessee was under Section 139(1). It was evident that no notice under Section 139(2) was at all issued by the Income-tax Officer to the petitioner; and, therefore, the Income-tax Officer could not make a best judgment assessment under Section 144 of the Act and the bar against assessment provided in Section 153(1)(a)(iii) of the Act was not attracted. The return filed on May 12, 1975, having been filed beyond time, the Income-tax Officer was not unjustified in treating the same as non est. Therefore, the ground that the notice under Section 147 could not be issued because the return already filed by the petitioner was pending was unsustainable.
(emphasis supplied).
29. In this context, it is pertinent to refer to the Head Notes from Raj Kumar Chawla’s case (supra) as under:
The proviso to Section 143(2) is applicable to a valid return and not to an invalid return. Whenever a notice is issued Under Section 148, calling for a return as time limit of filing return will be prescribed, the A.O. will never issue a notice granting the assessee unlimited period to file the return. If he does so, he would be doing so at his own peril, If the return is not filed within that period, that would not amount to a return pursuant to notice Under Section 148.
30. Once the return filed by the assessee on 23.12.2002 is invalid, the A.O. is not in fact, legally obliged to issue notice Under Section 143(2). After expiry of the time allowed by him in the notice Under Section 148(1), the A.O. had issued notice Under Section 142(1) on 18.12.2002 and thereafter the assessee had filed the return on 23.12.2002, Therefore, the authorities cited by the ld. A.R. in support of his contention are not applicable. Notwithstanding we are of the considered view that non-issuance of notice Under Section 143(2) will only tantamount to an irregularity and will not vitiate the entire assessment. We are supported in our view by the decision of Hon’ble Allahabad High Court in St. Baba Mohan Singh v. CIT ; It is held therein that the power Under Section 31(3)(a) of 1922 Act to annual an assessment is a power to be exercised where the assessment proceeding is a nullity in the sense that the ITO had no jurisdiction ab initio to take the proceedings. A proceeding is a nullity when the authority taking it has no jurisdiction either because of want of pecuniary jurisdiction or a territorial jurisdiction or a jurisdiction over the subject matter of the proceedings, Omission of the ITO to issue a notice Under Section 23(3) did not affect the ab initio jurisdiction enjoyed by the ITO in respect of the proceedings. After rectifying the omission by issuing the notice, he can proceed to complete the assessment. Similar decision was taken by the Hon’ble Rajasthan High Court in CIT v. Gyan Prakash Gupta and also by I.T.A.T. Special Bench in Nawal Kishore’s case (supra). The Hon’ble Delhi High Court in CIT v. Regency Express Builders (P) Ltd. held that “Even assuming for the sake of convenience that notice Under Section 143(2) of the Act was served has been received on behalf of the assessee on December 29th, 2000, then there was no occasion that the assessee or his representative appeared before the A.O. on January 11, 2001. In that case, issue was that if notice is not served on the assessee then whether assessment proceeding would be a nullity. Hon’ble Delhi High Court held against it. In our considered view, firstly, the A.O. was not required to issue notice Under Section 143(2) as there was no valid return filed by the assessee within the prescribed time given by the A.O. in the notice Under Section 148(1) and secondly even otherwise, such non-issuance of notice Under Section 143(2) is mere irregularity and, will not make the assessment void ab initio. Such an irregularity particularly in case of re-assessment proceeding is rectifiable and therefore, the matter can not be sent back to the A.O.
31. We notice in the present case that the A.O. had issued notice Under Section 142(1) in response to which the assessee had produced the books of account and vouchers etc, which are in fact required to be produced in response to notice Under Section 143(2). Practically, all the requirements of a notice Under Section 143(2) have been met in response to notice Under Section 142(1). Really, no prejudice is caused to the assessee.
32. On merits, we agree with the ld. A.R. that the A.O. has not given sufficient time to produce the creditors. The assessee was asked to produce the creditors on 27.12.2002 and assessment was completed on 30.12.2002. In such a short time, creditors could not have been produced. The loans of the creditors are old and they have dealings with the assessee. In our considered view, the A.O. should give adequate time to the assessee to produce the creditors so that he can satisfy himself about the creditworthiness of the creditors and genuineness of the transaction. Regarding the disallowance of expenses, we are again of the considered view that adequate opportunity has not been given to the assessee to justify the claim. Questionnaire was issued on 27.12.2002 and assessment was completed on 31.12.2002. Let the A.O. give adequate opportunity to the assessee to prove the expenses. The A.O. will keep in mind that books are audited and expenses have been subjected to verification by the auditors. Without pointing out any specific defects about non-verifiability of expenses or that a particular expenditure was not incurred for business purposes the A.O. does not get jurisdiction to make disallowance. We restore this issue to the file of the A.O.
33. Regarding the claim Under Section 80 IA, we are of the considered view that once re-opening of the assessment is, justified then the assessee will be within its right to submit audit report in Form No. 10CCB at any time before completion of the assessment. Even if the return filed is non-est., the audit report cannot become non-est. It can always be filed at any time before the completion of the assessment in respect of the return. 34. Even though re-opening of the assessment is for taxing escaped income, but once assessment is opened, it is opened for all purposes. In any event, the income for the purpose of re-assessment cannot be reduced beyond the income originally assessed as basically a assessment is reopened on account of escapement of income. If by allowing any claim or deduction the income gets reduced, then it is not permissible under the law to reduce the income originally assessed. Even, if the assessee’s fresh claims during the course of re-assessment and enquiries relating to escaped income are accepted, still the allowance of the claim should be limited to the extent to which they reduce the income to what was originally assessed. As held by the Hon’ble Supreme Court in CIT v. Sun Engg. Works (P) Ltd. (1992), 198 ITR-197 (SC) income for the purposes of re-assessment cannot be reduced beyond the income originally assessed. Re-assessment proceedings are initiated for the benefit of the Revenue and it is impermissible to the assessee to claim deductions in the re-assessment proceedings, which would reduce the total income that may be computed in the re-assessment proceedings to a figure lower than what was determined in the original assessment. The Hon’ble Madras High Court in India Forge & Drop Stampings Ltd. v. CIT following the decision of Hon’ble Supreme court in Sun Engg. Case (supra), held the similar view.
In this regard it will be useful to refer to the relevant portion of the head notes from the decision in Sun Eng. Case (supra):
…Indeed, in the reassessment proceedings for bringing to tax items which had escaped assessment, it would be open to the assessee to put forward claims for deduction of any expenditure in respect of that income or regarding the non-taxability of the items at all. Section 147, being for the benefit of the Revenue and not the assesses, the assessee cannot be permitted to convert the reassessment proceedings into an 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”. Even in cases where the claims of the assessee during the course of reassessment proceedings relating to the escaped income are accepted, still the allowance of such claims rule 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….
(emphasis supplied)
35. Therefore, we are of the view that the claim of the assessee Under Section 80 IA can only be allowed /restricted to the extent it brings down total income to what was originally assessed. We, therefore, restore this issue to the file of A.O. to examine the claim of the assessee Under Section 80 IA afresh and allow it to the extent that it does not reduce the total income below what was originally assessed.
36. Before concluding, we may refer to certain decisions cited by the parties on the technical issues raised by the assessee. All these decisions have been duly considered while arriving at the conclusions mentioned above.
37. In Dass Builders (P) Ltd. v. DCIT (2006), 280 ITR-77 (Alld.), it was held that where reasons were recorded on the basis of inference drawn from the defects in the books of account, then notice issued thereafter will not be valid.
38. In Praful Chunni Lal (sic), case (supra), it was held by the Hon’ble Gujarat High Court that even where there is a complete disclosure of all relevant facts by the assessee and the A.O, subsequently discovers mistake in assessment, then such assessment within four years would be valid.
39. In Chuggamal Rajpal v. Chaliah (1971), 79 ITR-603 (SC) it was held by. the Hon’ble Supreme Court that where A.O. had not shown his reasons for belief that income had escaped assessment by reason of assessee’s failure to disclose metereal facts and issuance of notice Under Section 143 will not be valid.
40. In Sheo Nath Singh v. ACIT 82 ITR-147 (SC) it was held that the so-called reasons stated to be the beliefs by the A.O. were an obvious self contradictions. There was no meterial or fact which had been stated on which any belief would be founded. The worlds “Reason to belief suggest that the belief must be of an honest and reasonable person based upon reasonable grounds. The ITO may act on direct or substantial evidence but not on mere suspicion gossip or rumour.
41. In Ganga Saran & Sons (y) Ltd. v. ITO (1981), 130 ITR-01 (SC) the facts are that the business was carried on at Delhi by one D. It was taken over by the assessee-company D was appointed Director to manage Delhi business. Salary commission and bonus paid to D was allowed as deduction in original assessment. Re-assessment was sought to be made to disallow these deductions on the ground that D had given substantial amount as loan to Managing Director and gifts to his near relatives and drew small amounts for himself. Notice Under Section 148(l)/147(a) was held to be not valid.
42. In ITO v. Lakhmani Mewal Das , the Hon’ble Supreme Court held that there should be live-link between material available with the AO and belief formed by him. Interest paid to creditors were allowed as deduction. Subsequent information was received that the creditors were name lenders. There was no indication that information was relating to loan taken by the assessee. The Hon’ble Supreme Court held that no nexus was present.
43. In Jai Engg. Works case, 113 ITR-389 it was held that it is quite competent for the income-tax authorities not only to accept the auditor’s report but also to draw the proper inference from the same.
44. In Selected Dalur Band Coal Company’s case, 217 ITR-597, the Hon’ble Court held that where there is suppression of material fact like a letter from the Chief Medical Officer that collieries had been inspected and there had been under reporting of coal raised, re-assessment proceedings based on that information would be valid.
45. In Rattan Gupta’s Case, 234 ITR-220(Del), it was held that sufficiency of material to form belief cannot be examined by the courts.
46. In P.S. Beedis P. Ltd., 237 ITR-13 (SC), it was held that internal audit report is entitled to point out factual error or omission in assessment and opening of the case on the basis of factual error pointed out by internal Audit party in permissible under the law.
47. In Dr. Amin’s Pathology Laboratories case, 252 ITR- 673 (Bom), it was held that mere production of balance sheet or account books would not amount to disclosure of material facts necessary for assessment.
48. In Rakesh Agarwal’s case, 221 ITR-492 (Del) it was held that mere production of evidence is not sufficient, material lying embedded in evidence must be brought to the notice of Assessing Authority. Where interest free securities were given to the assessee in compensation for lower rent and that fact was not disclosed to the A.O. then the re-assessment proceedings would become valid.
49. In Garden Finance Ltd. case, 268 ITR-48 (Guj), that assessee had filed hire agreements for hiring of vehicles but there was failure to draw attention to clauses of agreement. It was held that re-assessment proceedings were valid.
50. In Nanak Chand Laxmi Das case, 140 ITR-151 (Alld) it was held that initial onus lies on the assessee to prove the nature and source of cash credit, mere confirmatory letters from the alleged creditors is not sufficient evidence to prove genuineness of the loan. It was held that the addition Under Section 68 was valid.
51. In Bharti (P) Ltd. case, 111 ITR-951, it was found that the notices to the alleged creditors sent by the AO came back un-served, the assessee was unable to establish identity of creditors though he filed confirmatory letters. It was hold that mere filing of confirmatory letters did not discharge the onus on the assessee.
52. In Transport Corporation of India case, 256 ITR-701(AP), it was held that mere payment by itself would not entitle the assessee to deduction of expenditure unless the same was proved to be paid for commercial considerations. The burden of proof is always upon the assessee. It is for the tax payer to establish by evidence that a particular allowance is justified. It is not for the ITO to independently collect evidence and prove that the deduction claimed by the assessee is base-less.
53. In Goodyear India’s case 246 ITR-116 (Del), where the details of expenditure were not substantiated by vouchers and the assessee was unable to furnish the details and justify the claims, then disallowance of expenditure was justified. Further that availability of tax audit report docs not preclude the AO from calling for supporting material from the assessee.
54. In Chandra Vilas Hotel’s case, 164. ITR-102 (Guj), the amounts were claimed to be paid as commission, there was not evidence to support the claim than the amounts could be treated as income of the assessee. In assessment proceedings rules of evidence do not apply and the ITO can collect material evidence by private enquiry and the assessee must be given information about the material so collected and must be given opportunity to explain the same.
55. In Rama Shankar Gupta’s case (275-ITR-628), it was held that where, re-assessment proceedings are initiated then original assessments ceased to be operative and during re-assessment proceedings re-valuation to assets can be made.
56. In Chettinad Corporation’s case, 200-ITR/320(SC), it was held that re-opening of assessment is only for the benefit of revenue. The assessee is not entitled to agitate the matters concluded in original assessment and not dealt with in re-assessment proceedings.
As a result, we restore the matter to the file of the AO to give adequate opportunity of being heard to the assessee to produce the creditors and to explain the credits and also to make assessment in the light of directions given above and in-accordance with law.
Regarding interest, we direct the AO to work out the same as per law on the basis of finally assessed income.
The appeal of the assessee is partly allowed for statistical purposes
This order was pronounced in the open court on 29.6.07.