ITAT Delhi Quashes Reassessment as Reopening Was Based Only on Audit Objection

A2Z Waste Management (Ranchi) Limited Vs DCIT (ITAT Delhi)

The Income Tax Appellate Tribunal, Delhi Bench, considered an appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) dated 24 January 2024 arising from reassessment proceedings under Sections 144 and 147 of the Income Tax Act, 1961 for Assessment Year 2013-14.

The assessee had originally filed its return of income on 29 September 2013 declaring nil income. The assessment was completed under Section 143(3) on 30 December 2015 accepting the returned income at nil. Subsequently, the case was reopened under Section 148 on the basis of a revenue audit objection. The Assessing Officer alleged that the assessee had wrongly claimed set-off of brought forward business losses amounting to Rs.1,14,74,526 against current year interest income of Rs.1,14,63,496, which according to the Assessing Officer was taxable under the head “Income from Other Sources” and therefore not eligible for set-off under Section 72 of the Act.

A reassessment order was thereafter passed disallowing the claim of set-off and assessing the income at Rs.1,14,74,526. On appeal, the Commissioner (Appeals) partly allowed the assessee’s claim by treating interest earned on fixed deposits kept as margin money for availing loans as business income and deleting addition to the extent of Rs.80,20,400. However, the remaining disallowance was confirmed.

Before the Tribunal, the assessee challenged both the reopening proceedings and the disallowance of set-off. Additional grounds of appeal were also raised questioning the validity of proceedings under Sections 147 and 148, the approval granted under Section 151, and the treatment of interest income from loans and advances given to group or subsidiary companies as income from other sources instead of business income.

The assessee argued that the reassessment proceedings were initiated solely on the basis of a revenue audit objection without any fresh tangible material. It was submitted that during the original assessment proceedings, all material facts had been fully and truly disclosed before the Assessing Officer, who had examined the books of account and supporting documents before accepting the returned income. According to the assessee, reopening the completed assessment on the basis of material already available on record amounted to a mere change of opinion.

The assessee further contended that audit objections could constitute “information” for reopening assessments only after the amendment introduced by the Finance Act, 2022 through Explanation 1(ii) to Section 148. Since the reassessment proceedings in the present case had been initiated before that amendment, reopening solely on the basis of an audit objection was not legally sustainable. Reliance was placed on several judgments including CIT v. Simbhaoli Sugar Mills Ltd., FIS Global Business Solutions India (P) Ltd. v. ACIT, and PCIT v. Network Programme India Ltd..

The Revenue opposed admission of the additional grounds and argued that the assessee had not participated before the Assessing Officer and that the reassessment order had been passed ex parte. It was also submitted that the Commissioner (Appeals) had already granted partial relief regarding interest on fixed deposits treated as business income.

The Tribunal admitted the additional grounds observing that they raised legal issues going to the root of the matter and that all relevant facts were already available on record. The Tribunal then examined the reasons recorded for reopening the assessment. The recorded reasons referred to examination of the assessment records and a revenue audit objection regarding set-off of business losses against interest income. The Assessing Officer had concluded that interest income earned on fixed deposits could not be treated as business income merely because the deposits were maintained as margin money for obtaining loans.

The Tribunal found that the reopening was based solely on a revisit of assessment records and the audit objection without any fresh or tangible material. It observed that all material facts had already been disclosed by the assessee during the original assessment proceedings and that the Assessing Officer had accepted the claim after examination of the records. The Tribunal held that formation of a different opinion on the same material amounted to a mere change of opinion, which could not justify reassessment proceedings.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals)-3, Noida [CIT(A), in short] dated 24.01.2024 in Appeal No. CIT(A), Gurgaon -1/10343/2018-19 arising out of order passed u/s 144/147 of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) dated 16.11.2018 for Assessment Year 2013-14.

2. Brief facts of the case are that assessee has filed its return of income on 29.09.2013 declaring total income of Rs. Nil. The assessment was completed u/s 143(3) vide order dated 30.12.2015 accepting the income declared by the assessee at Nil. Thereafter, based on the audit objection case of the assessee was reopened by issue of notice u/s 148 and the reason for reopening was that the assessee has claimed set off of brought forward business loss of Rs. 1,14,74,526/- against current years interest income of Rs.1,14,63,496/- which as per the AO is contrary to the provisions of section 72 of the Act. The AO further observed that since interest income taxable under the head “Income from other sources”, therefore, no set off could be claimed for the brought forward business loss against the interest income taxable under the head Income from other sources. Thereafter, the reassessment order was passed, disallowing the claim of the assessee of set off of brought forward business loss and accordingly, total income was assessed at Rs.1,14,74,526/-.

3. Against the said order, assessee filed an appeal before the Ld. CIT(A) who partly allowed the claim of the assessee and allowed the set off of brought forward business loss against the income earned on FDRs with bank made for the purpose of margin money to avail loan being income from business and deleted the addition to the extent of Rs. 80,20,400/- i.e. the interest income on FDR and confirmed the balance disallowance made by the AO.

4. Against the said order, the assessee is in appeal before the Tribunal wherein the assessee has taken following grounds of appeal:

“1. That under the facts and circumstances initiation of proceedings under section 147/148 are without jurisdiction, on borrowed satisfaction, without application of mind, unwarranted, mechanical and unsustainable in law and on merits.

2. That under the facts and circumstances, the approval under section 151 is fatally defective, mechanical and without application of mind which makes the whole proceedings without jurisdiction, illegal and unwarranted.

3. That under the fact & circumstance, Ld. A.O. as well as Ld. CIT(A) erred in law in considering Interest income from Loans & advances given to Group/subsidiary companies as income from other sources instead of Business income.

3.1. That under the fact & circumstance, Ld. A.O. as well as Ld. CIT(A) erred in law in not allowing set-off of brought forward business loss from interest income from Loans & advances given to Group/subsidiary companies.

3.2. That under the fact & circumstance, Ld. A.O. as well as Ld. CIT(A) erred in law in not allowing set-off of brought forward unabsorbed Depreciation from interest income from Loans & advances given to Group/subsidiary companies.”

5. During course of hearing in terms of the letter dated 26.10.2024 filed on 12.11.2024, assessee has raised the following additional grounds of appeal:

ADDITIONAL GROUND No. 1:-

“That under the facts and circumstances, initiation of proceedings under section 147 / 148 are without jurisdiction, on borrowed satisfaction, without application of mind, unwarranted, mechanical and unsustainable in law and on merits.”

ADDITIONAL GROUND No. 2:-

“That under the facts and circumstances, the approval under section 151 is fatally defective, mechanical and without application of mind which makes the whole proceedings without Jurisdiction, illegal and unwarranted.”

ADDITIONAL GROUND No. 3:-

“That under the facts and circumstances, Ld. AO as well as Ld. CIT(A) erred in law in considering Interest Income from loans & advances given to Group/ Subsidiary company as income from other sources instead of business income.”

ADDITIONAL GROUND No. 4:-

“That under the facts and circumstances, Ld. AO us well as Ld. CIT(A) erred in law in not allowing set-off of brought forward unabsorbed depreciation from interest income from loans & advances given to Group /subsidiary companies.”

5.1 It is stated that the additional grounds of appeal goes to the root of the matter and only legal issues are raised for which all the facts are available on record and no verification is required, therefore, it is prayed to admit the same. For this, reliance is placed on the judgment of NTPC ltd. reported in 229 ITR 385 (SC) and Gedore Tools Pvt. Ltd. reported in 238 ITR 268 (Delhi).

6. On the other hand, the Ld. Sr. DR vehemently opposed the admission of the additional grounds and submits that they required verification of facts, therefore, the same should not be admitted at this stage.

7. Heard both the parties and perused the materials available on record. From the perusal of additional grounds of appeal, it is observed that in the additional grounds, assessee has challenged the satisfaction recorded before the grating the approval for reopening the assessment u/s 147 of the Act and further challenged the action of the AO in not allowing set-off of brought forward unabsorbed depreciation out of interest income earned from term loans and advances given to subsidiary/group companies. Since, all the facts pertaining to these additional grounds of appeal are already available on record and no verification is required, therefore, the additional grounds of appeal taken by the assessee are admitted for adjudication.

8. First we take the additional ground Nos. 1 and 2 wherein the assessee has challenged the reopening of the assessment completed u/s 143(3) without proper application of mind and on the basis of material already available on record thus is mere change of opinion.

9. Before us, the Ld.AR submits that in this case assessment was already completed u/s 143(3) of the Act and from the perusal of copy of the reasons recorded as reproduced at page 2 of the reassessment order, it could be seen that reassessment proceedings were initiated on the basis of Revenue audit objection who has raised the objection after examining the material already available on record and no fresh material/evidence was referred. The Ld. AR submits that during the course of original assessment proceedings, assessee has submitted all the materials facts necessary for the completion of the assessment and truly and fully disclosed the facts before the AO. The AR drew our attention to the assessment order passed u/s 143(3) dated 30.12.2015 wherein the AO specifically observed that all the details were submitted and books of accounts along with supporting documents were examined on test check basis. Thereafter ore, the AO had completed the assessment accepted the income declared in the return of income filed by the assessee and allowed the set off of brought forward unabsorbed loss and depreciation as claimed. The Ld. AR further submits that satisfaction of escapement of income has been recorded on the basis of material already available on record and further submits that reopening on the basis of audited party objection could be made only after amendment made vide Finance Act,2022 w.e.f 01.04.2022 in Explanation 1(ii) of Section 148 of the Act, whereby the scope and ambit of the term “information” for initiating the re­assessment proceedings were amended and now any audit objection to the effect that the assessment in the case of the assessee has not been made in accordance with the provisions of the Act is also considered to be a valid information for the purposes of section 148 of the Act. Ld. AR submits that the reassessment proceedings in the instant cases were initiated much before the aforesaid amendment thus solely based on revenue audit objection without referring to any fresh and tangible materials reopening of completed assessment deserves to be hold bad in law and consequent reassessment order passed be cancelled. The Ld. AR placed reliance on the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Sibbhaoli Sugar Mills Ltd. reported in (2011)333 ITR 470 (Delhi) and on the judgement of hon’ble Delhi High court in the case of FIS Global Business Solutions India (P) Ltd. vs. ACTT reported in 408 ITR 75 (Del.) wherein the hon’ble high Court has held that reassessment based on review of material already on record of assessment made under s. 143(3) is change of opinion, hence, invalid. Further held that audit objection does not constitute reason to belief for the purpose of initiating reassessment proceedings. Ld. AR further placed reliance on the judgment of the Hon’ble Delhi High Court in the case of PCIT vs. Network Programme India Ltd. reported in [2024] 461 ITR 37 (Delhi). He prayed accordingly.

10. On the other hand, the Ld. Sr. DR submits that the assessee has not participated before the AO and the reassessment order was passed ex-parte. Further no objection was raised with respect to the reopening of the assessee before the AO. Ld. Sr. DR further submits that Ld. CIT(A) has already allowed the set off brought forward business loss against the interest income on the FDRs made for the purpose of securing the contracts by holding the same as business income, thus, there is no reason to hold the remaining interest being eligible for set off against the brought forward unabsorbed business loss and he prayed for confirmation of the order of the lower authorities.

11. Heard the parties and perused the materials available on record. The reopening of the reasons recorded for reopening of the assessment u/s 147 of the Act reads as under:

“On perusal of assessment records, it has been noticed that assessment in this case was completed vide order u/s 143(3) dated 30.12.2015 at nil income against nil returned income. In response to the objection raised by RAP reeardine business loss of Rs.1,14,63,496/ set off by assessee against interest income, assessee has submitted as under:-

“We would like to inform you that the interest income reported by us is in the nature of business income. This interest income is in respect of FD placed by it as margin money for availing loan from hank. Loan from bank was taken to fund our business of waste management. As per requirement of the bank, we had to place a FD with bank as margin money. Hence the sole purpose of maintaining the FD was to avail loan from bank which was utilized in the business. Hence the nature of the same should be treated as business income”.

Merely by saying that the company had to place an FD with bank as margin money to avail loan from bank does not make income from other sources i.e. interest income earned thereof a business income. Therefore, the contention of the assessee co. is not found tenable. In light of the above, it becomes evident that business loss of Rs.1,14,74,526/- (Rs. 11030 for A.Y. 2011-12 and Rs. 1,14,63,496 for A.Y. 2012-13) set off by the assessee co. against the interest income of Rs. 1,14,63,496/- earned by it during the year under consideration was against the provision of Section 72 because carried forwarded business loss of previous years cannot be set off against income earned from other sources of succeeding years.

I therefore, have reason to believe that the income amounting to Rs. 1,14,63,496/-has escaped assessment for A.Y. 2015-14 on account of failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment of A.Y. 2013­14.

Notice u/s 148 of the I. T Act is required to be issued for A.Y. 2013-14.”

12. From the perusal of the same, it could be seen that the reopening has been done on the basis of revisit of the assessment records and the Revenue audit objection raised dated 08.02.2017 which was to be complied with by the AO immediately, the same is reproduced herein below:

13. As observed above, from the perusal of the reasons recorded for reopening the assessment, it is observed that AO solely on the basis of Revenue audit objection has proceeded to reopen the assessment without their being any fresh and tangible material referred nor any independent satisfaction has been recorded. From the reasons it appears that all the material available on record, revenue audit party has raised the objection, therefore, it cannot be said that assessee has failed to disclosed truly and fully all the material facts necessary for the assessment. The formation of belief on same material is mere change of opinion on which reassessment of the completed assessment is not permitted. The Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd. reported in (2002) 174 CTR (Del), has held as under:

“However, one needs to give a schematic Interpretation to the words ‘reason to believe’ falling which, we are afraid, s 147 would give arbitrary powers to the AQ to reopen assessments on the basis of ‘mere change of opinion, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AD has no power to review he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, In the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion’ as an Inbuilt test to check abuse of power by the AO.”

14. Further following the aforesaid order, the Hon’ble High Court in the case of CIT vs. Simbhaoli Sugar Mills Ltd. (supra) on the issue of re-opening on the basis of audit objection has held as under:

“12. The sum and substance of the discussion is that reassessment proceedings under s. 147 read with s. 148 of the Act cannot be Initiated merely based on the audit report. An audit is principally Intended for the purpose of satisfying the auditor with regard to the sufficiency of rules and procedures prescribed for the purpose of securing an effective check on the assessment, collection and proper allocation of revenue. As per paragraph (3) of the circular Issued by the Board on 28th July, 1960, also an audit Department should not in any way substitute itself for the Revenue authorities in the performance of their statutory duties.

13. In view of our foregoing discussion, we are in complete agreement with the conclusion arrived at by the Tribunal in the Impugned orders.”

15. Similar view was expressed by the Hon’ble Delhi High in the case of FIS Global Business Solutions India (P) Ltd. (supra). It is further relevant to state that the aforesaid order of Hon’ble Delhi High Court is confirmed by the Hon’ble Supreme Court by dismissing the SLP of the Revenue. The Hon’ble Delhi High Court in the case of PCIT vs. Network Programme India Ltd. (supra) has held as under:

“Reassessment-Validity-Audit objection-vis-a-vis lack of new tangible material-In the present case, the respondent/assessee had made full disclosure relating to why it had debited the expenses incurred by it, i.e., on software development for business purposes, in the note appended to the computation of income in the return of income filed qua the relevant assessment year-Thus, there is no dispute about the fact that the original assessment was completed under s. 143(3), via order dt. 24th April, 2005-Therefore, given this factual position, agreeing with the view taken by the Tribunal, that this was a case of change of opinion and, therefore, the reassessment proceeding could not have been triggered merely on the basis of audit objection, without any fresh tangible material-Accordingly no substantial question of law arises for consideration.

16. Admittedly, in the instant case the reopening was done on the basis of revenue audit objection which is based on the material already available on record. Therefore, there can be no doubt in the facts of this case that the reopening of the assessment by the impugned notice is merely on the basis of change of opinion of the assessing officer. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment. Thus by respectfully following the aforesaid judgements of hon’ble Apex court and of jurisdictional high court, we are of the considered view that in the instant case, the reopening has been done solely on the basis of the audit objection, without brining any fresh and tangible material to hold that assessee has failed to disclosed fully and truly by the material facts necessary for assessment, therefore, we hold the notice issued u/s 148 as invalid and consequent reassessment order passed is hereby quashed. The additional grounds of appeal No. 1& 2 of the assessee are thus allowed.

17. Since we have already allowed additional Grounds of appeal No. 1 & 2 raised by the assessee thus other grounds of appeal are not adjudicated.

18. In the final result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 08.05.2026.