Whether when AO initiates reassessment proceedings after giving notice, AO's jurisdiction is restricted to reassess income only to the extent of materials, which were basis for issuance of notice - NO, entire assessment: Delhi HC

THE question before the Bench is - Whether when the AO initiates reassessment proceedings after giving notice, the AO's jurisdiction is restricted to scrutinise or reassess the income only to the extent of materials, which were the basis for issuance of the notice or the entire assessment. And the verdict goes against the assessee.

Facts of the case

Assessee is an NBFC, engaged in the business of sale and purchase of shares and financing. It showed a loss of Rs. 2.01 lakhs in share trading. Its assessment was reopened u/s 147 on the basis of the report of search opeartions conducted on certain accommodation entry providers. As per the report of Investigation Wing, assessee had received accommodation

entry amount of Rs.5,08,687/- in the F.Y. 2000-01 under the garb of share application money/share capital/bogus gifts. Thus, the notice u/s 148 was rightly issued. As a result of reassessment, AO added

the sum of Rs.1,10,896/-, being 2% of the total unexplained balance in the bank account, as income in the assessee’s hands by way of commission on hawala entries. On appeal, CIT(A) noticed that there was no documentary evidence in support of the assessee's contentions that the other income claimed was consisting of commission received. Thus, the CIT(A) rejected the appellant’s contentions.

On further appeal, the Tribunal upheld the reopening of assessment. Before the HC, the assessee's counsel contended that the Tribunal and the lower authorities completely misdirected themselves and overlooked the materials in respect of each entry and transactions reflected in the books. It was submitted that the appellant had, during the reassessment proceedings, entirely submitted its records and disclosed the same to the AO. It was also contended that the additions made cannot be upheld because they do not form part of the “reasons to believe”, which in the first instance, impelled the Department to reopen the proceedings.

Having heard the matter, the High Court held that:

++ in the SC decision of V. Jagan Mohan Rao and Others v. CIT and Excess Profits Tax, it was stated on behalf of the appellant that in any case the ITO could have legitimately assessed one-third share of the income which was due to the assessee according to the judgment of the Madras HC and there was escape only to the extent of two-thirds share of the income. This argument is not of much avail to the appellant because once proceedings u/s 34 are taken to be validly initiated with regard to two-thirds share of the income, the jurisdiction of the ITO cannot be confined only to that portion of the income. Section 34 in terms states that once the ITO decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice u/s 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section(2) of section 22 the previous under-assessment is set aside and the whole assessment proceedings start afresh. When once valid proceedings are started u/s 34(1)(b) the ITO had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year;

++ the law as it existed always was that if a valid notice u/s 147 was issued by the AO, the scope of scrutiny and final assessment made in the reopening proceedings was not conditioned upon the material which impelled him to issue notice. To hold such a view would be to impinge on the concededly wide power conferred upon the Revenue in Section 147/148 and undermine its objective. Consequently, the appellant’s contentions in this regard are rejected;

++ the notice u/s 147 reflected due application of mind to objective material furnished to the AO, i.e. by way of Investigation Report which could have given rise to a bonafide belief, legitimately falling within Section 147. As regards other issue, i.e. addition of Rs.1,10,896/- is concerned, this Court notices that this question was again gone into elaborately by the CIT(A), who, however, sought for remand report. After reading the appellate Commissioner’s order, it is clear that the materials produced before the AO and also discussed by the AO in the remand report were taken into consideration. Furthermore, it is not as if the entire amount of Rs.55,44,816/- which was shown to be the balance in the bank account of the appellant is sought to be added back. In that regard, the assessee’s explanations were somewhat accepted. The Revenue has proceeded on the footing that the appellant provided some services and charged him only to the commission reasonably earned by it, i.e. Rs.1,10,896/-. Being a pure question of fact, this Court cannot, exercising jurisdiction to consider substantial questions of law, convert it into a third Court of fact and examine the concurrent findings. As a result of the above discussion, the Court is satisfied that the ITAT’s order does not call for any interference. For the above reasons, the Court does not find any substantial question of law which requires to be answered in the appeal. Similarly, the petition seeking intervention of Court under Article 226 in respect of the ITAT’s order rejecting the application for rectification is devoid of merits.