Heard learned counsel for the revisionist and the learned standing counsel.
The instant revision calls in question an order dated 12 April 2007 in terms of which the Tribunal, while disposing of a batch of appeals preferred by the assessee as well as the Department, has made certain observations leaving it open to the assessing authority to redraw reassessment proceedings by issuance of a fresh notice. The order passed by the Tribunal primarily seeks to validate proceedings for reassessment which had been drawn up by the assessing authority by exercise of powers conferred by section 21 of the 1948 Act. The controversy itself arises in the following backdrop of facts.
On the record is a permission letter dated 27 March 2003 penned by the Additional Commissioner in which he takes note of certain facts having come to light with respect to the assessment undertaken in Assessment Year 1996-97. The authority notes that the assessing officer had found that although certain import declarations had been shown as remaining in closing stock, it appears that the same had in fact been utilized in the year of assessment itself and not carried forwarded to the next year. The Additional Commissioner accordingly granted permission to the assessing authority to initiate proceedings for reassessment as contemplated under Section 21 of the 1948 Act. Although the assessee was called upon to show cause and give a reply, there appears to have arisen a situation where a prayer for adjournment was refused and the reassessment itself finalized thereafter.
A reading of the order dated 29 March 2003 passed under Section 21 establishes that it was the case of the Department that although the assessee had shown 390 Forms-31 as remaining in closing stock, it had already utilized 238 such Forms in the assessment year in question without making an appropriate disclosure in this respect. In view thereof, the assessing authority proceeded to record a finding that of the 238 Forms, the total sales turnover was estimated to be Rs.41,50,000/-. He then proceeded to compute the tax liability at a rate of 4% and held that the assessee was liable to pay Rs.1,66,000/- as additional tax. While the matter could have rested here, the controversy itself has arisen from the manner in which the assessing authority thereafter proceeded. The assessing authority then proceeded to take note of the quantity of SSF which was manufactured from coal. Placing reliance upon a decision of the Supreme Court in Tvl. K.A.K. Anwar and Co. Vs. State of Tamil Nadu1 it had proceeded to hold that the assessee would be liable to be tax on the manufacture of SSF. The total sales turnover of SSF was thereafter estimated to be Rs. 52,80,000/- and additional tax of Rs.2,11,200/- computed in respect thereof. The challenge to this order as raised by the assessee failed both before the first appellate authority as well as the Tribunal. Before this Court, the learned counsel has not raised any issue with respect to the reassessment insofar as Forms 31 are concerned. The objection which is taken is to the assessment with respect to SSF which as is contended never formed subject matter of the show cause notice.
The Tribunal as noted above, has interfered with the order passed under Section 21 on the ground that the issue of SSF did not form part of the show cause which was issued to the assessee and therefore the ends of justice would merit the assessing authority being permitted to put the assessee to notice and thereafter proceed in the matter afresh. While ordinarily a permission or liberty to re draw proceedings may not be found fault with, the issue assumes significance in light of the nature of the power which the assessing authority was exercising in the facts of the present case.
Admittedly, the assessing authority was exercising powers and jurisdiction conferred by Section 21 of the 1948 Act. Section 21, which confers a power of reassessment, empowers the assessing authority to proceed even after assessment has been undertaken when he has "reason to believe" that the whole or any part of the turnover in any assessment year of the dealer has either escaped assessment to tax or has been under-assessed or has been assessed to tax at a rate lower than that at which it is assessable under the Act. The power under Section 21 therefore presupposes and postulates the formation of opinion on the aforementioned issues. It is upon the assessing authority being satisfied that the conditions precedent for invocation of Section 21 exist that it would proceeded to obtain permission and put the assessee to notice. The formation of an opinion as well as having a reason to believe that the assessee has been under assessed or that turnover has escaped assessment must necessarily be based on material on record or evidence which comes to the fore tending to indicate that the assessee had been under assessed or that the turnover had escaped assessment. The formation of an opinion and the material on record which forms its substratum and core have an inseparable link and connect. It is on the state of the record as noticed and taken into account that the assessing authority proceeds to form an opinion that the turnover has escaped assessment. In view of the above, the exercise of powers under Section 21 must necessarily be confined to the material which has led the assessing authority to form an opinion that the turnover had escaped assessment. It is the grounds and the material upon which the assessing authority bases his opinion, comes to conclude and formulates a "reason to believe" alone that the reassessment must be confined. This material and basis which represents the foundation of the formation of opinion cannot be expanded or supplemented in the course of a re-assessment exercise. The initiation of reassessment cannot have the effect of a opening of sluice gates, so to speak, enabling the assessing authority to undertake a de novo assessment. The course of these proceedings also cannot be directed or diverted on the basis of new material or new grounds that may come to the notice of the assessing authority after initiation of reassessment. It is more than well settled that a power to re-assess is not license to revisit, revamp or to change an opinion in respect of a particular issue which may have formed subject matter of an assessment proceeding.
The expression "reason to believe" is no longer a term of inglorious uncertainties but has been explained in various decisions to mean the assessing authority having reasonable ground or justification to know and suppose that income has escaped assessment. However in order to underline, the inherent limits on this power, the Court deems it apposite to refer to the reiteration of the law on the subject as appearing in a decision rendered by three learned Judges of the Supreme Court in State of U.P. Vs. Aryaverth Chawal Udyog2. Noticing the similarity in language and scope between section 21 of the 1948 Act and section 147 of the Income Tax Act, the Supreme Court observed:-
"20. In context of Section 21 of the Act, the position of law was explained succinctly by this Court in CST v. Bhagwan Industries (P) Ltd. [CST v. Bhagwan Industries (P) Ltd., (1973) 3 SCC 265] as follows: (SCC pp. 271-72, paras 11-12)
"11. The controversy between the parties has centred on the point as to whether assessing authority in the present case had reason to believe that any part of the turnover of the respondent had escaped assessment to tax for Assessment Year 1957-1958. Question in the circumstances arises as to what is the import of the words "reason to believe", as used in the section. In our opinion, these words convey that there must be some rational basis for the assessing authority to form the belief that the whole or any part of the turnover of a dealer has, for any reason, escaped assessment to tax for some year. If such a basis exists, the assessing authority can proceed in the manner laid down in the section. To put it differently, if there are, in fact, some reasonable grounds for the assessing authority to believe that the whole or any part of the turnover of a dealer has escaped assessment, it can take action under the section. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction to take action under the section. Whether the grounds are adequate or not is not a matter which would be gone into by the High Court or this Court; for the sufficiency of the grounds which induced the assessing authority to act is not a justiciable issue. What can be challenged is the existence of the belief but not the sufficiency of reasons for the belief. At the same time, it is necessary to observe that the belief must be held in good faith and should not be a mere pretence.
12. It may also be mentioned that at the stage of the issue of notice the consideration which has to weigh is whether there is some relevant material giving rise to prima facie inference that some turnover has escaped assessment. The question as to whether that material is sufficient for making assessment or reassessment under Section 21 of the Act would be gone into after notice is issued to the dealer and he has been heard in the matter or given an opportunity for that purpose. The assessing authority would then decide the matter in the light of material already in its possession as well as fresh material procured as a result of the enquiry which may be considered necessary."
23. This Court in Aslam Mohammad Merchant case [Aslam Mohammad Merchant v. Competent Authority, (2008) 14 SCC 186 : (2009) 2 SCC (Cri) 793] has reaffirmed the earlier view taken in Phool Chand Bajrang Lal v. ITO [Phool Chand Bajrang Lal v. ITO, (1993) 4 SCC 77] , wherein, this Court, after a detailed analysis of the import of the words "reason to believe" in the phraseology of Section 147 of the IT Act, has observed thus: (Aslam Mohammad case [Aslam Mohammad Merchant v. Competent Authority, (2008) 14 SCC 186 : (2009) 2 SCC (Cri) 793] , SCC pp. 205-06, para 51)
"51. ... ''25. From a combined review of the judgments of this Court, it follows that an Income Tax Officer acquires jurisdiction to reopen an assessment under Section 147(a) read with Section 148 of the Income Tax Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that, by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profits or gains chargeable to income tax has escaped assessment. He may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the Income Tax Officer, the sufficiency of reasons for forming this belief is not for the Court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the Court may look into the conclusion arrived at by the Income Tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income Tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief.' (Phool Chand case [Phool Chand Bajrang Lal v. ITO, (1993) 4 SCC 77] , SCC pp. 95-96, para 25)"
(See ITO v. Lakhmani Mewal Das [ITO v. Lakhmani Mewal Das, (1976) 3 SCC 757 : 1976 SCC (Tax) 402 : (1976) 3 SCR 956] ; Chhugamal Rajpal v. S.P. Chaliha [Chhugamal Rajpal v. S.P. Chaliha, (1971) 1 SCC 453 : (1971) 3 SCR 342] ; Calcutta Discount Co. Ltd. v. ITO [Calcutta Discount Co. Ltd. v. ITO, (1961) 2 SCR 241 : (1961) 41 ITR 191] and S. Narayanappa v. CIT [S. Narayanappa v. CIT, (1967) 1 SCR 590 : (1967) 63 ITR 219] .)
28. This Court has consistently held that such material on which the assessing authority bases its opinion must not be arbitrary, irrational, vague, distant or irrelevant. It must bring home the appropriate rationale of action taken by the assessing authority in pursuance of such belief. In case of absence of such material, this Court in clear terms has held the action taken by the assessing authority on such "reason to believe" as arbitrary and bad in law. In case of the same material being present before the assessing authority during both, the assessment proceedings and the issuance of notice for reassessment proceedings, it cannot be said by the assessing authority that "reason to believe" for initiating reassessment is an error discovered in the earlier view taken by it during original assessment proceedings. (See Delhi Cloth and General Mills Co. Ltd. v. State of Rajasthan [Delhi Cloth and General Mills Co. Ltd. v. State of Rajasthan, (1980) 4 SCC 71 : 1980 SCC (Tax) 348] .)
29. The standard of reason exercised by the assessing authority is laid down as that of an honest and prudent person who would act on reasonable grounds and come to a cogent conclusion. The necessary sequitur is that a mere change of opinion while perusing the same material cannot be a "reason to believe" that a case of escaped assessment exists requiring assessment proceedings to be reopened. (See Binani Industries Ltd. v. CCT [Binani Industries Ltd.v. CCT, (2007) 15 SCC 435] ; A.L.A. Firm v. CIT [A.L.A. Firm v. CIT, (1991) 2 SCC 558] .) If a conscious application of mind is made to the relevant facts and material available or existing at the relevant point of time while making the assessment and again a different or divergent view is reached, it would tantamount to "change of opinion". If an assessing authority forms an opinion during the original assessment proceedings on the basis of material facts and subsequently finds it to be erroneous; it is not a valid reason under the law for reassessment. Thus, reason to believe cannot be said to be the subjective satisfaction of the assessing authority but means an objective view on the disclosed information in the particular case and must be based on firm and concrete facts that some income has escaped assessment.
31. The above observations regarding the import of the words "reason to believe" though made in the context of different statutes have, in our opinion, equal bearing on the construction of those words in Section 21 of the Act."
In view of the inextricable and umbilical link between the material and the formation of an opinion, in the considered view of this Court, it was wholly improper for the assessing authority to proceeded to assess the revisionist with respect to the sale of SSF. As noted above, the assessing authority had never decided to reassess the revisionist on the issue of SSF. The formation of opin
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ion was based solely upon material which seemed to suggest that the disclosure with respect to closing stock of forms was incorrect. This issue alone formed subject matter of the permission granted as well as the show cause notice. The scope of reassessment should have therefore necessarily stood confined to the above. During the reassessment or after the said process was set in motion, it was not open to the assessing authority to review the entire assessment undertaken earlier. The path which the assessing authority proceeded to traverse could not have been validated or conferred an "imprimatur" by the Tribunal. This more fundamentally so since this issue neither formed the subject matter of the permission which was accorded by the Additional Commissioner, nor did it form part of the show cause notice. This fundamental flaw in the course adopted by the assessing authority could not have been cured by the liberty which was accorded by the Tribunal in terms of the order impugned. This additionally because the power to reassess was authorized by the Additional Commissioner in terms of the proviso to section 21. But for this permission, admittedly, the assessing authority had no jurisdiction to initiate or commence proceedings for reassessment. Accordingly and for the reasons noted above, this revision shall stand allowed. The order of the Tribunal insofar as it accords liberty to the assessing authority to proceed in the matter afresh after issuance of notice is hereby set aside. In consequence, reassessment by the assessing authority insofar as the sales turnover of SSF shall also fail and fall. This, however, would not preclude the respondents from proceeding further in the matter if permissible in law.