Reasons Based on Material Already Available on Record Invalidates Reopening

DCIT Vs Paveljeet Singh Ruppal (ITAT Delhi)

The Assessing Officer has to demonstrate from the records that there has been a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Here in this case, the assessee has duly disclosed the factum of total secured loan, total interest claimed, total advances given, etc. All these facts were duly available on the record at the time of original assessment proceedings. The ‘reasons recorded’ itself speaks that the point on which Assessing Officer has sought to raise, already stood disclosed in the profit and loss account and nothing has been found which has not been disclosed. If the assessee has disclosed all the material facts necessary for the assessment in his return of income and in the audited financial statement, then the legal inference which has to be drawn is upon the Assessing Officer and not upon the assessee. The 1st proviso to section 147 puts embargo of time limit of four years from the end of the relevant assessment year where assessments have been done under section 143(3), if the twin conditions provided therein are not met. The said proviso is an explicit safeguard which prohibits the Assessing Officer from exercising the power to re-assess where the assessment has already been completed u/s. 143(3). If is there any over sight or inadvertent mistake of the Assessing Officer in the original assessment proceedings which has been  discovered by him later on reconsideration of same material, then it tantamount to ‘change of opinion’, more so in cases where the reopening is hit by first proviso to Section 147 (supra). In such cases, law does not permit the Assessing Officer to reopen a concluded assessment after expiry of 4 years from the end of the relevant assessment year like in the present case.

Further, Hon’ble Jurisdictional Delhi High Court in the case of Oracle India Pvt. Ltd. vs. ACIT, as reported in (2017) 397 ITR 480 (Del), held that where audited accounts were already available with the Assessing Officer and form part of the assessment record, then merely suggesting that there was failure on the part of the assessee to compute and declare the true taxable income without further clarification would not justify reopening of the assessment after the limitation period of four years. 10. The aforesaid judgments in principle will apply mutatis mutandis on the present ‘reasons’ also, because here in this case there is no element of lack of true and full disclosure on the part of the assessee and the reasons are based on the material which was already on record. Thus, such a reason cannot clothe the Assessing Officer with the jurisdiction to reopen the assessment after the expiry of four years from the end of the relevant assessment year, merely on bald observation that there was failure on the part of the assessee to compute and declare the true taxable income .

Ld. CIT (A) has taken note of all these facts and after relying upon the principle laid down by the Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561, held that the reopening has been done merely on “change of opinion” and Assessing Officer has no power to review the earlier assessment. The aforesaid finding of the ld. CIT (A) is both factually and legally correct and no interference is called for. Accordingly, we hold that reassessment proceeding u/s 147 vide notice dated 17.03.2015 u/s 148 is bad in law and void ab initio and secondly the entire reassessment proceedings is quashed. 12. In the result, the appeal of the Revenue is dismissed

FULL TEXT OF THE ORDER OF ITAT DELHI

The aforesaid appeal has been filed by the Revenue against the impugned order dated 14.12.2017 by ld. Commissioner of Income Tax (Appeal)-XVIII, New Delhi for the quantum of assessment passed u/s.147/148 for the Assessment Year 2008-09. In the grounds of appeal, the Revenue has raised following grounds:

“(I) On the facts and in the circumstances o the case and in law, the ld. CIT(A) has erred in quashing the reopening of the assessment proceedings u/s 147 of the Act by ignoring the fact that, the case for AY 2008-09 was reopened by the AO citing that the addition made on same issue in case of the said assessee for AY 2009-10 which was sustained by Ld. CIT(A).

(II) On the facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in quashing the reopening of the assessment proceedings u/s 147 of the Act by ignoring the decision of Apex Court in the case of CIT vs. PVS Beedies Pvt. Ltd. whereby it is held that “Reopening of the case on the basis of a factual error pointed out by the audit party is permissible under law.”

(III) The appellant craves leave to add, to alter or amend any ground of appeal raised above at the time of hearing.”

2. The facts in brief are that the assessee had filed his return of income on 30.09.2008 on a total income of Rs.1,71,40,407/-. Thereafter, the assessee’s case was selected for scrutiny and assessment order was passed u/s.143(3) vide order dated 16.12.2010, after making additions on account of ad hoc disallowance of expenses and additional demand of income claimed by the appellant in the Profit and Loss Account. Income was finally assessed at Rs.1,82,73,260/-. After completion of the assessment in the aforesaid manner and after expiry of four years from the relevant assessment year, the assessee’s case was reopened u/s.147 by the issuance of notice u/s 148 dated 17.03.2015, after recording the following reasons:

“The assessment in this case was completed u/s. 143(3) on 16.12.2010 at an income of Rs.1,82,73,260/-. On examination it is found that the assessee had taken secured loan of Rs.4,09,54,814/- and claimed a total interest including bank charges of Rs.1,46,70,857/- .

Further, the assessee had given total loans and advances of Rs. 3,63,80,734/- to its sister concern. On perusal of record of date, it is observed that it is a case of funding of sister concern at the cost of assessee. It is important to mention that this issue came up for detailed discussion during the proceedings for A.Y. 2009-10. After examining the issue at length, Ld. Assessing Officer vide his an order dated 11.12.2011 came to conclusion that proportionate disallowance of interest to the tune of rs. 23,15,181/- is to be made to that assessment year. The CIT(A) has also sustained the said addition on the issue vide order date 06.11.2013.

On examination of the records available before me, I find that in this year also the proportionate interest claimed on secured loan is not an allowable expenditure as per the calculation below:

Form these facts and after due application of mind, I have reason to believe that income chargeable to tax has escaped assessment for the A.Y. 2008-09 for the reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment ”

3. In response to the said notice, the assessee filed a letter stating that original return filed on 30.09.2008 may be treated as return filed in response to notice u/s.148. Thereafter, the ld. Assessing Officer proceeded to make disallowance on account of proportionate interest on borrowed funds at Rs.1,05,13,743/- u/s.36(1)(iii). The disallowance was made on the ground that loan and advances were given to its sister concerns for sums aggregating to Rs.3,63,80,734/- on which no interest was charged, and assessee was paying interest on loans.

4. Before the ld. CIT (A) assessee had challenged the validity of reopening u/s.147 on various counts which has been discussed in detail from pages 3 to 7 of the appellate order. After considering the entire material on record and judgments relied upon, the ld. CIT (A) quashed the re­assessment proceedings u/s.147. His detail finding reads as under:

4.3 I have considered the facts of the case and the submission made by the AR. On perusal of the written submission and the documents furnished by the AR, it is observed that the main contentions of the appellant are as under:

i. The competent authority has not applied his mind before granting approval for the reopening of the case u/s 147 of the Act;

ii. The AO has not been able to show that the income has escaped assessment due to any failure on the part of the appellant, to disclose fully 86 truly all material facts;

iii. The AO has reopened the assessment merely on the basis of audit objection and without having any tangible material to show that income has escaped assessment;

iv. The reopening of the assessment amounts to review of the earlier assessment order by the AO;

v. The AO had accepted the reply of the appellant on the issue of interest during the course of rectification proceedings u/s 154 of the Act.

4.4 On perusal of the various documents filed by the AR, it is observed that the sequence of events following the original assessment u/s 143(3) of the Act vide order dated 16.12.2010, is that the audit party raised two objections vide audit memo dated 19.09.2011 and these objections raised related to the disallowance of interest u/s 36(1)(iii) of the Act and excess allowance of TDS credit. The AO issued a notice u/s 154/155 of the Act on 21.09.2011 giving an opportunity to the appellant in respect of the two proposed additions by stating as under:

“Audit scrutiny reveals that-

1. TDS claim of Rs. 10,08,039/- should be disallowed while calculating the tax u/s 143(3) for AY 2008-09.

2. The assessee had given the total loans & advances of Rs. 3,63,80,734/- to its sister concern. Hence, reasonable proportion of interest of Rs. 1,05,13,743/- to be disallowed and to be added to the income of the assessee.”

The appellant replied to this notice u/s 154 of the Act vide letters dated 22.11.2011 86 28.12.2Q11. After considering these replies, the AO passed the order under section 154 on 04.01.2012, in which the AO has disallowed the excess credit of TDS granted to the appellant and has rectified the mistake, thereby implying that the AO has accepted the reply of the appellant in respect of the proposed addition related to the disallowance of interest of Rs. 1,05,13,743/- u/s 36(i)(iii) of the Act. However, the AO reopened the case u/s 147 of the Act on 17.03.2015 by recording reasons to believe that the income amounting to Rs. 1,05,13,743/- has escaped assessment and the interest of this amount is required to be disallowed u/s 36(l)(iii) of the Act.

4.4.1 From the above sequence of events, it is clear that there is a change of opinion as far as the disallowance of interest u/s 36(l)(iii) of the Act, is concerned in this case. In the original assessment proceedings, the AO had issued a detailed questionnaire on 12.05.2010, in which the AO had specifically asked the details about the loans and advances taken/granted by the appellant and after consideration of all the documents filed before him, had finalized the assessment without making any disallowance of interest. Moreover, even after the audit objection was raised, the AO proposed to make the disallowance of interest u/s 154 of the Act, but after considering the reply of the appellant, the AO did not make any such addition and surprisingly, after more than three years of the said rectification order u/s 154 of the Act, the AO has reopened the assessment on the same issue. This flip flop on the part of the AO is nothing but mere change of opinion and there is nothing on record to show that any income has escaped assessment due to any failure on the part of the appellant.

4.4.2 In this regard, reference is made to the decision of Apex Court in the case of Commissioner of Income Tax Vs. Kelvinator of India Limited, (2010) 320 ITR 561, in which the Supreme Court observed that post 01-04-1989, the power to reopen is much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which, Section 147 would give arbitrary powers to the Assessing Officer to reopen the assessments on the basis of mere change of opinion’ which cannot be per se reason to reopen. The conceptual difference between the power to review and power to reassess is to be kept in mind. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on the fulfillment ol certain preconditions and if the concept of ‘change of opinion’ is removed, in the garb of re-opening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an in-built test to check abuse of power by the Assessing officer. Hence, after 01-08-1989, the Assessing Officer has power to reopen, provided there is ‘tangible material’ to come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation of the belief.

In the present case, the AO has not been able to place on record any material which led to the formation of his belief that some income has escaped assessment on account of failure on the part of the appellant.

4.4.3 In Jai Hotels Co. Limited Vs. Asst. DIT, (2009) 24 DTR 37 (Del), the Hon’ble Delhi High Court has held that there being no new material in the hands of the Revenue leading to the view that there was reason to believe that income had escaped assessment, the case is a classic instance of a change of opinion. The High Court further observed that when copies of statement of income, trading account, profit and loss account, audit report etc., were appended to the return filed by the assessee, taking resort to Section 147/148 was unwarranted as it constituted a change of opinion, since the material acted upon had been made available along with return of income.

4.4.4 From the above discussion, it has become clear that the AO has reopened the assessment merely due to change of opinion which had resulted due to the audit objection. There was no material on record to prove that some income has escaped assessment due to the failure of the appellant. In view of these facts and the legal position as discussed in detail above, I am constrained to quash the reopening of the assessment proceedings u/s 147 of the Act.

5. Ground Nos. 3, 4 & 5 are related to the addition of Rs. 1,05,13,743/- made by the AO by disallowing interest u/s 36(l)(iii) of the Act. As the assessment has been quashed, these grounds of appeal have become infructuous and for statistical purposes, the same may be treated as allowed.”

5. We have heard the rival submissions and perused the relevant material placed on record as well as the finding of the ld. CIT (A). Admittedly, in this case, the original return of income was filed on 30.09.2008 which was subject to scrutiny proceedings u/s. 143(2) and assessment was completed u/s.143(3) vide order dated 16.12.2010. Thereafter it is borne out from the order of Ld. CIT(A) that audit party has raised two objections relating to; i) excess allowance of TDS credit of Rs. 10,08,039/-; and ii) disallowance of interest u/s.36(1)(iii) Rs. 1,05,13,743/- on loans given to sister concerns. Based on this audit objection, notice u/s.154/155 was issued by the Assessing Officer on 21.09.2011. In response, the assessee had filed his detailed reply and after considering the same, Assessing Officer disallowed the excess credit of TDS granted to the assessee and justified and second issue was accepted. However, after 3¹/₂ years, in so far as disallowance of interest of Rs.1,05,13,743/- as proposed in the audit objection and also raised by the Assessing Officer in the proceedings u/s.154, the Assessing Officer has sought to reopen the case u/s.147 vide notice dated 17.03.2015 after recording the aforesaid reasons.

6. First of all, from the bare perusal of the reasons recorded, it is seen that there is no reference of any tangible material coming on record after completion of the assessment u/s 143(3) so as to suggest that there is any income chargeable to tax which has escaped assessment. The reasons are purely based on re-examining of the same balance sheet and profit & loss account to come to a reason to believe that income chargeable to tax has escaped assessment and to be on account of failure on part of the assessee to disclose trully and fully all material facts. In this case, it has to be kept in mind that that reopening of assessment completed u/s 143(3) is sought to be done after the expiry of four years from the end of the relevant assessment year and therefore, limitation and conditions provided in first proviso to Section 147 is clearly applicable. It is trite and well settled law that in cases where assessment has been completed u/s.143(3) and same is being sought to be reopened after the expiry of four years from the end of the relevant assessment year, the statute put fetters on the power of the Assessing Officer in terms of first proviso, which provides that, where an assessment under sub-section (3) of section 143 or 147 has been made for the relevant assessment year, then no action shall be taken under section 147/148 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. Thus, the reopening in the aforesaid circumstances is permissible only when, firstly, any income chargeable to tax has escaped assessment by the reason of the failure on the part of the assessee to make return; or secondly, failure to disclose fully and truly all material facts necessary for the assessment.

7. In so far as the first condition is concerned, it is an undisputed fact and also accepted by the Assessing Officer that return of income u/s.139(1) was filed. In so far as the second condition is concern, i.e., the failure on the part of the assessee to disclose fully and truly all material facts is necessary for the assessment, the same has not been demonstrated by the Assessing Officer in the reasons recorded and mere bald statement that there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment cannot justify the reopening in terms of proviso to Section 147. The Assessing Officer has to demonstrate from the records that there has been a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Here in this case, the assessee has duly disclosed the factum of total secured loan, total interest claimed, total advances given, etc. All these facts were duly available on the record at the time of original assessment proceedings. The ‘reasons recorded’ itself speaks that the point on which Assessing Officer has sought to raise, already stood disclosed in the profit and loss account and nothing has been found which has not been disclosed. If the assessee has disclosed all the material facts necessary for the assessment in his return of income and in the audited financial statement, then the legal inference which has to be drawn is upon the Assessing Officer and not upon the assessee. The 1st proviso to section 147 puts embargo of time limit of four years from the end of the relevant assessment year where assessments have been done under section 143(3), if the twin conditions provided therein are not met. The said proviso is an explicit safeguard which prohibits the Assessing Officer from exercising the power to re-assess where the assessment has already been completed u/s. 143(3). If is there any over sight or inadvertent mistake of the Assessing Officer in the original assessment proceedings which has been discovered by him later on reconsideration of same material, then it tantamount to ‘change of opinion’, more so in cases where the reopening is hit by first proviso to Section 147 (supra). In such cases, law does not permit the Assessing Officer to reopen a concluded assessment after expiry of 4 years from the end of the relevant assessment year like in the present case.

8. In the latest judgment of Hon’ble Supreme Court in the case of PCIT vs. L&T Ltd., reported in (2020) 268 Taxman 390, the Hon’ble Supreme Court wherein the question for consideration was; “Whether on the facts and circumstances of the case, the Tribunal was correct in law in holding that the notice issue u/s.148 was not valid on the ground that Assessing Officer has not demonstrated the failure of the assessee in disclosing the material fact?” Their Lordships after reproducing the reasons recorded by the Assessing Officer for issuing notice u/s.148 observed as under:

“2. The appeal as arises out of the judgment of the Income Tax Appellate Tribunal in which it was held that the notice of reopening which was issued beyond the period of 4 years from the end of the relevant assessment year, was invalid. We may reproduce the reasons recorded by the Assessing Officer for issuing such a notice :

“(i) It was seen from the records that while computing the deduction u/s 80-IA, certain pass through components like Fuel adjustment Charges (FAC), electricity duty, wheeling charges, grid support charges etc. have not been considered for arriving at the market value of the electricity.

(ii) For the purpose of claiming deduction u/s 80-IA, excess profit from the generation of electricity has been shown as against ‘16% return on investment’ fixed by the Ministry of Power.

(iii) Various expenses like interest, commission, brokerage and corporate overheads were not debited to the separate Profit & Loss A/c. Further, sales and administrative expenditure is not proportionate to the expenditure debited in consolidated P&L A/c to the profit of 80-IA units, which has resulted in excess deduction u/s 80-IA.

(iv) The assessee claimed deduction u/s 80-IA, 80HHB, 80HHBA, 80-HHC, 80HHE etc. However, exemption claimed u/s 80-IA was not reduced from other chapter VI­A deduction as per provisions contained in Section 80-IA.

(v) Deduction u/s 80-IA was wrongly claimed in respect of work on contract basis for various Govt. Agencies, which cannot be considered as infrastructure provider.”

3. Perusal of the reasons recorded by the Assessing Officer would show that the Tribunal was perfectly correct in coming to the conclusion that the notice of reopening of assessment was invalid. From the reasons we gather that there was no element of lack of true and full disclosure on the part of the assessee, which resulted into any income chargeable to tax escaping assessment. The reasons clearly reveal that the Assessing Officer was proceeding on the material which was already on record. In the absence of the statutory requirement of income chargeable to tax have been escaped assessment due to the failure on the part of the assessee to disclose truly and fully all material facts been satisfied, the Tribunal correctly held that the notice of reopening of assessment was invalid. No question of law arises.”

9. Further, Hon’ble Jurisdictional Delhi High Court in the case of Oracle India Pvt. Ltd. vs. ACIT, as reported in (2017) 397 ITR 480 (Del), held that where audited accounts were already available with the Assessing Officer and form part of the assessment record, then merely suggesting that there was failure on the part of the assessee to compute and declare the true taxable income without further clarification would not justify reopening of the assessment after the limitation period of four years.

10. The aforesaid judgments in principle will apply mutatis mutandis on the present ‘reasons’ also, because here in this case there is no element of lack of true and full disclosure on the part of the assessee and the reasons are based on the material which was already on record. Thus, such a reason cannot clothe the Assessing Officer with the jurisdiction to reopen the assessment after the expiry of four years from the end of the relevant assessment year, merely on bald observation that there was failure on the part of the assessee to compute and declare the true taxable income .

11. CIT (A) has taken note of all these facts and after relying upon the principle laid down by the Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561, held that the reopening has been done merely on “change of opinion” and Assessing Officer has no power to review the earlier assessment. The aforesaid finding of the ld. CIT (A) is both factually and legally correct and no interference is called for. Accordingly, we hold that re­assessment proceeding u/s 147 vide notice dated 17.03.2015 u/s 148 is bad in law and void ab initio and secondly the entire reassessment proceedings is quashed.

12. In the result, the appeal of the Revenue is dismissed. Order pronounced in the open Court on 17th May, 2021.