Reopening not permissible beyond 4 years where AO failed to consider material produced before him

Issue before court:

• Whether tribunal has rightly set aside the reassessment proceedings initiated after passage of four years on account of failure of AO to look and consider the material produced before him at the time of assessment proceedings u/s 143 (3).

Brief facts:

• The assessee is engaged in the business of manufacture and sale of drugs. The assessee filed return of income on 29.11.1996 pertaining to AY 1996-97 declaring total income of Rs.14,45,260/-. The return was subsequently selected for scrutiny and income was assessed at Rs.17,16,211/-.
• Subsequently, after expiry of four years, Section 147 proceeding was initiated by issue of notice dated 4.2.03 u/s 148 of the Income Tax Act.
• Revenue alleged that the assessee company purchased software package and the expenses incurred in this regard was claimed as revenue expenditure, which is contrary to Section 37 of the Income Tax Act, whereas the said deduction should have been allowed under Section 35D of the Act. This amount, according to the department, is capital in nature.
• Insofar as project appraisal fee paid to ITCOT is concerned, claim for revenue deduction was totally allowed, though one-tenth of the expenditure alone is eligible for being claimed as revenue expenditure. On the basis of this proceeding, the income was determined and reassessment was ordered.
• The CIT (A) dismissed the appeal filed by the assessee and, thereafter, the matter was taken up before the Tribunal by the assessee. The Tribunal accepted the assessee’s plea that there was no failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment.

Contention of the revenue:

• The finding of the Tribunal that the reopening is bad as there was no failure on the part of the assessee to disclose the material facts at the time of regular assessment is totally wrong.
• It is further submitted that in the original assessments, the Assessing Officer had no occasion to consider the issue of disallowance in respect of the amount paid to ITCOT towards integrated system package.
• The Tribunal failed to appreciate that Explanation 1 to Section 147 is applicable to the facts of the present case.

Contention of the Assessee:

• There was no failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment.
• Action taken under Section 147 r/w Section 148 of the Act has been taken in this case after expiry of four years from the end of the relevant assessment year despite the fact that the original assessment was filed under Section 143 (3) of the Act.

Held by the Court:

• There is no element of failure to disclose fully and truly all material facts necessary for assessment. Therefore, there was no justification for the department for invocation of proceeding under Section 147 r/w 148 of the Income Tax Act.
• Our stand is further fortified by the decision of this Court in TCA No.217/2015 dated 2.6.2015, wherein in a similar matter, this Court has held as under :-

“16. Our view is fortified by the decision of the Full Bench of the Delhi High Court in the case of Commissioner of Income Tax V. Kelvinator of India Ltd. reported in [2002] 256 ITR 1 (Del), wherein, the Delhi High Court held as follows:

“We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the Assessing Officer had received information from an audit report which was not before the Income-tax Officer, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself.”

• The above said decision of the Full Bench of the Delhi High Court was upheld by the Supreme Court in the decision reported in [2010] 320 ITR 561 (SC) Commissioner of Income-Tax Vs Kelvinator of India Ltd.
• When the AO had failed to record anywhere his satisfaction or belief that the income chargeable to tax had escaped assessment on account of the failure of the assessee to disclose truly and fully all material facts necessary for assessment.
• On the contrary, it was the Assessing Officer, who failed to consider the materials placed before him at the time of regular assessment for which the assessee cannot be found fault with.

Conclusion:

Provision of section 147 states that revenue can reopen an assessment within four years, from the end of the relevant assessment year in which return was filed, if any income escaped from assessment. If revenue wants to reopen an assessment after the expiry of four years prescribed then there must be failure on part of assessee to disclose fully and truly all material facts. In this case all the facts are produced before AO during the original course of the assessment. At that time he failed to consider it so the condition envisaged above of non-disclosure of material applies for assessee not for the AO. Means assessment can not be reopened on the part of failure of the AO.