Discount towards sale of low-quality sponge iron to sister concern duly allowable

DCIT Vs Sunil Sponge Pvt. Ltd. (ITAT Raipur)

ITAT Raipur held that addition on account of discount allowed to sister concern unsustainable as assessee duly placed on record documentary evidence to substantiate the factum of having sold low-quality sponge iron to its sister concern. Accordingly, rejection of discount merely on the basis of doubts and suspicion unjustified.

Facts- The assessee company, which is engaged in the business of manufacturing and trading of steel items. After the culmination of the original assessment proceedings, AO observed that the assessee company had, during the year under consideration, made sales of Rs.21,14,43,116/- to its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd., Raipur.

AO observed that assessee company had credited the account of the M/s. Sunil Re-roller and Steels Pvt. Ltd. by an amount of Rs.1,64,20,225/- with a narration “being the 225 MT @1000/- PMT debited by steel due to quality def”. The assessee company had credited the account of the purchaser, i.e., M/s Sunil Re-roller and Steels Pvt. Ltd. towards quality defect on the basis of a journal entry, but there was no corresponding debit of the said amount in its Profit & Loss account. AO noticed that the assessee company had reduced the amount of Rs.1.64 crore from the account of the aforementioned purchaser/debtor. Holding a conviction that the assessee company had suppressed its sales and debtors by Rs.1.64 Crore, AO reopened its concluded assessment u/s.147 of the Act.

Conclusion- Apropos the observation of the A.O as to why the said discount did not find a place in the “books of account” from time to time when the assessee company supplied goods to its sister concern and had been credited in the latter’s account only on the last day of the accounting year, i.e., on 31.03.2007, we concur with the view taken by the CIT(Appeals) that the same was for the reason that as “quantity discount” was only to be allowed if the sister concern lifted more than 10000 PMT sponge iron, and determination of the total amount of sponge iron that was purchased by the sister concern during the year could be arrived at only after end of the financial year. Considering the aforesaid facts, we find no infirmity in the crediting of the amount of discount, e., both quality and quantity discount by the assessee company in the account of the sister concern on the last date of the financial year, i.e., on 31.03.2007.

Held that though the assessee company had duly placed on record documentary evidence to substantiate the factum of having sold low-quality sponge iron to its sister concern, the same had been rejected by the A.O merely on the basis of doubts and suspicion and is not backed by any cogent reason much the less any material which would dislodge the authenticity of the same.

FULL TEXT OF THE ORDER OF ITAT RAIPUR

The present appeal filed by the revenue is directed against the order passed by the Commissioner of Income-Tax (Appeals)-3, Bhopal, dated 25.02.2022, which in turn arises from the order passed by the A.O under Sec. 147 r.w.s 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) dated 28.03.2014 for assessment year 2007-08. The revenue has assailed the impugned order on the following grounds of appeal:

“1. “Whether or not on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in holding that the AO not having any fresh information/material in his possession, merely on assumption formed his belief about escapement of income ignoring the fact that the assessee has not disclosed fully and truly material facts during original assessment proceedings and has suppressed its sales by way of giving discount to M/s Sunil Steel Ltd., which comes under definition of person specified u/s40A(2)(b) of the Act?”

2.”Whether or not on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in plainly relying upon version of assessee and in deleting the addition of Rs.1,64,20,225/- made by the AO on account of discount allowed by the assessee on sales”.

2. Succinctly stated, the assessee company, which is engaged in the business of manufacturing and trading of steel items, had filed its return of income for A.Y.2007-08 on 01.11.2017, declaring an income of Rs.55,755/-.

3. The A.O. framed the original assessment vide his order passed u/s.143(3) of the Act dated 31.12.2009, determining the income of the assessee company at Rs.3,55,755/-.

4. After the culmination of the original assessment proceedings, it was observed by the A.O. that the assessee company had, during the year under consideration, made sales of Rs.21,14,43,116/- to its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd., Raipur. On a perusal of the records, it was observed by the A.O. that the assessee company had credited the account of the aforementioned concern, viz. M/s. Sunil Re-roller and Steels Pvt. Ltd. (supra) by an amount of Rs.1,64,20,225/- with a narration “being the 225 MT @1000/- PMT debited by steel due to quality def”. It was observed by the A.O. that though the assessee company had credited the account of the aforementioned purchaser, i.e., M/s Sunil Re-roller and Steels Pvt. Ltd. (supra) towards quality defect on the basis of a journal entry, but there was no corresponding debit of the said amount in its Profit & Loss account. The A.O. noticed that the assessee company had reduced the aforesaid amount of Rs.1.64 crore (supra) from the account of the aforementioned purchaser/debtor. Holding a conviction that the assessee company had suppressed its sales and debtors by Rs.1.64 Crore (supra), the A.O. reopened its concluded assessment u/s.147 of the Act. Notice /s.148 of the Act dated 22.03.2013 was issued by the A.O. In compliance, the assessee company requested that its original return of income that was filed on 01.11.2017 be treated as a return filed in response to the notice issued u/s.148 of the Act.

5. Although the assessee company, during the course of the assessment proceedings, had assailed the validity of the jurisdiction that was assumed by the A.O. for reopening its concluded assessment, the same did not find favor with him. The A.O. was of the view that as the assessee company had failed to disclose fully and truly all material facts that were necessary for framing the assessment, its case was validly reopened u/s.147 of the Act.

6. Apropos the credit of Rs.1.64 crore (supra) that was allowed by the assessee company to its sister concern, viz. M/s Sunil Re-roller and Steels Ltd. (supra), it was claimed by the assessee that the same was towards quantity and quality discount that was allowed @ Rs.1 000/- PMT on the basis of an “agreement” with its aforesaid sister concern. It was, thus, claimed by the assessee company that the aforesaid discount of Rs.1.64 crore (supra) was with respect to 1636.92 MT (out of 16,433.325 MT) of inferior quality of products that were supplied to its aforesaid sister concern. The assessee company furnished with the A.O the bifurcated details of the aforesaid quantity and quality discount of Rs.1.64 crore (supra) that was allowed to its sister concern, as under:

However, the A.O. was not inspired by the aforesaid explanation of the assessee company. The A.O. was of the view that the assessee company, in the garb of the aforesaid quantity and quality discount, had, as a matter of fact, suppressed its sales. Referring to the “agreement” (photocopy filed with the A.O) that was executed by the assessee company for the supply of sponge iron to its aforesaid sister concern, it was observed by the A.O that the same was executed on a plain sheet and did not carry the name of the signatories. The A.O. held a conviction that the aforesaid document, executed by the assessee company with its sister concern, was nothing but a colorable device to portray a sham transaction as a genuine transaction and, thus, was not inspired by the veracity of the contents of the same.

6.1 Apart from that, the A.O. held a firm conviction that the nature of the journal entry towards quantity and quality discount that the assessee company had passed in the books of account on 31.03.2007 also did not inspire any confidence. Elaborating on his aforesaid observation, the A.O was of the view that it was incomprehensible that though the assessee company had allegedly supplied low-grade goods to its sister concern, however, the claim of discount was never made from time to time in its accounts as per terms of the agreement. Carrying his observation further, the A.O. believed that the assessee company’s claim of quality discount @1200/- PMT was not in conformity with its original claim of a flat rate of Rs.1000/- PMT. Further, the A.O. observed that the claim for “quantity discount” that was projected by the assessee company in its calculation of the total discount of Rs.1.64 crore (supra) was also an entirely new element.

6.2 Regarding the laboratory test reports claimed to be done by M/s Sunil Re-roller and Steels Pvt. Ltd. i.e., the purchaser concern as well as by the assessee company; and also the correspondence between the aforementioned parties which made a reference about the products being of inferior quality, it was observed by the A.O that the assessee company in the course of the original assessment proceedings had categorically stated that it had not preserved records of the lab test reports. Accordingly, the A.O. was of the view that the assessee company had generated the lab test reports only to give the color of genuineness to its aforesaid claim which was basically the brainchild of an afterthought. Apart from that, it was observed by the A.O. that the laboratory reports were photocopies of reports generated on plain paper and did not have any running number or identity number. As such, the A.O. declined to take cognizance of the aforesaid test reports that were filed by the assessee company in the course of proceedings before him.

6.3 The A.O. further observed that, unlike the three other unrelated concerns, viz. (i).M/s Vandana Global Ltd.; (ii). M/s Godawari Power & Ispat Ltd; and (iii). M/s Silphy Steel Pvt. Ltd. from whom the aforesaid sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd. (supra) was purchasing goods, it had purchased the goods from the assessee company at a substantially low price. Also, it was observed by the A.O. that while the assessee company had sold finished goods to various other unrelated parties in the open market at an average sale price of Rs. 16,900.23 per MT, but sold the same to its aforesaid sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd. (supra) at a substantially low price of 12,876.99 per MT, i.e., less by Rs.4023.24 per MT. Further, it was observed by the A.O. that though, as per the aforesaid “agreement” (supra), the assessee company was to supply sponge iron to its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd. (supra) at the normal market price, but the records revealed that the sale price was in itself far lower than the selling price of other comparative sale transactions. Accordingly, on the basis of his aforesaid deliberations, the A.O. concluded that the assessee company had suppressed both its sales and debtors by Rs.1.64 crore (supra). Based on his aforesaid observations, the A.O. made an addition of Rs.1 .64 crore (supra) to the returned income of the assessee company, and vide his order passed u/s. 147 r.w.s. 143(3) of the Act dated 28.03.2014 assessed its income at Rs.1.64 crore (approx.).

7. Aggrieved the assessee carried the matter in appeal before the CIT(Appeals), who, on the basis of his exhaustive deliberations, allowed the appeal. For the sake of clarity, the observations of the CIT(Appeals) who had agreed with the contentions advanced by the Ld. Authorized Representative (for short ‘AR’) for the assessee, as regards the validity of the jurisdiction assumed by the A.O. for reopening of the concluded assessment of the assessee company u/s.147 of the Act, as was challenged before him, are culled out as under:

“3.1.2 I have considered the factual matrix of the case, plea raised by the appellant and findings of the AO. This is a matter of fact that this case of the appellant was scrutinized earlier u/s 143(3) of the Act, *Wherein the appellant has furnished all the desired documents by the AO and the same were taken into consideration by the then AO. Thereafter,- this case has been re-opened after lapse of 4 years and hence case is covered under first proviso to section 147 of the Act which mandates that if the case was scrutinized u/s 143(3)/1 47 of the Act then the same can be re-opened u/s 147 of the Act with the pre-condition when there was a failure on the part of the assessee in furnishing full and true material facts necessary for the assessment for that assessment year. The appellant has vehemently contended that the documents on the basis of which the reassessment proceedings has been initiated were already available on the record of the AO and the reference to which finds place in reasons to believe recorded by-the AO. The said transaction is fully recorded in audited books of account of both the parties and is a revenue neutral transaction. Thus, as per appellant, there was no failure on the part of the assessee to disclose full and true material facts necessary for the assessment before the AO. AS far as the observations of the AO are concerned, it has been observed by the AO that the appellant has suppressed its sales firstly, by giving discount on quantity of sponge iron and secondly discount on quality. Thus, as per AO, the assessee had suppressed its sales by Rs.1,64,20,225/-. Having arrived to this conclusion, AO formed his belief that the income to the tune of Rs.1,64,20,225/- has escaped the assessment and case was re-opened u/s.147 of the Act by issuing notice u/s 148 of the Act.

3.1.3 I have found that the case of the appellant has been reopened on the basis of copy of account of M/s. Sunil Steels which was already available on the record. The case of the assessee was properly scrutinized during the original assessment proceedings u/s 143(3) of the Act. The then AO after considering material/facts on record and making certain enquiries on the issue of low yield rate made addition of Rs. 3,00,000/- on lumpsum basis on account of low yield rate. This shows that the assessment order was passed after considering all the material including copy of account of M/s Sunil Steels wherein, the assessee has credited amount of Rs.1,64,20,225/-. Though no specific question was raised on this issue but all material facts was on the record in form of copy of account, audit report etc. It is presumed that after mind of application would have been made by the AO and therefore, no adverse inference had been drawn during the original assessment proceedings on the issue of suppression of sales. Regarding availability of copy of account of M/s Sunil Steels on record, it has been found that the Id. AO himself has mentioned in the ‘reason for reopening the case/issuing notice u/s 148 of the IT Act’ that “It has been observed that during proceedings copy of account of M/s Sunil Steels, Raipur was filed….” This fact proves that the impugned material was already available on the record at the time. of recording of reason and was duly considered at the time of original assessment. proceedings. Further, reply dated 24.03.2014 to the objections raised by the assessee also proves that the impugned material was already on the record. In para 3 of letter dated 24.03.2014 issued by the AO following is mentioned:-

“ . the case was reopened on the basis of the copy of account of your sister concern M/s Sunil Steels which is available on record. The copy of account shows that the sale has been reduced to the extent of Rs.1.64 crores by passing a single entry on 31 .03.2007 with narration “quality difference”. Thus, the sales amounting to Rs. 1.64 crores was reduced only on the basis of a single phrase i.e. “quality difference” and no other material fact was provided by you. Therefore, it is a case where there was a failure on your part to disclose fully and truly all material fact necessary for assessment for the AY 2007-08.”

From the above discussion, it is evident that impugned material was submitted during the original assessment proceedings and the same is affirmed by the present AO and the then AO after considering, all the • material passed order. u/s 143(3) of the Act on 31.12.2009. No new material or evidence was available with the AO to form reason to believe as per the provisions of section 147 of the Act. It is also pertinent to mention that the id. AO has not held the discount/deduction given/granted as non genuine.

The facts as discussed above reveals that the reopening of the case has been done on the basis of mere Change of opinion. No assessment can be reopened on the basis of change of opinion. I rely upon the decision of Hon’ble Apex court in the case of in the case of ACIT vs Marko Limited (SPL (civil) diary No 7367/2020, order dated 01.06.2020) wherein SLP filed against the order of Hon’ble Bombay High Court by revenue was dismissed. The relevant para, which is from the order of Hon’ble Bombay High Court is reproduced hereunder:

“12. Thus we find that the reasons in support of the impugned notice is the very issue in respect of which the Assessing Officer has raised the query dated 25 September 2017 during the assessment proceedings and the Petitioner had responded to the same by its letters dated 10 December 2017 and 21 December, 2017 justifying its stand. The non-rejection of the explanation in the Assessment Order would amount to the Assessing Officer accepting the view of the assessee, thus taking a view/forming an opinion. Therefore, in these circumstances, the reasons in support of the impugned notice proceed on a mere change of opinion and therefore would be completely without jurisdiction in the present facts. Accordingly, the impugned notice dated 27 March 2019 is quashed and set aside.

In the circumstances, we see no reason to interfere in the matter. This Special Leave petition is, accordingly, dismissed”

Thus, the view taken by Hon’ble Bombay High Court was affirmed. The operative portion of the decision of Hon’ble Bombay High Court is reproduced as under:

6. We have considered the rival submissions. It is a settled position in law that the power to reopen an assessment within a period of four years from the end of the relevant assessment year, even when the assessment has been made cinder Section 143(3) of the Act, is not curtailed by the proviso it Section 147 of the Act. Therefore, even where an assessee has disclosed all material facts truly and fully for assessment and assessment is completed under Section 143(3) of the Act, the reopening is permissible within a period of four years from the end of the relevant assessment year. The only condition precedent for exercising the jurisdiction to reopen an assessment, is the Assessing Officer Auld have reasonable belief that income chargeable to tax has escaped assessment. This reason to believe that income chargeable to tax has escaped assessment should not be on the basis of change of opinion, as otherwise the power of reassessment would become a power of review, which it is not.

7. The Apex Court in Kelvinator of India Ltd. (supra), has while setting out the parameters for the exercise of powers of reopening an assessment had inter-alia observed as under :-

“However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer 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. But reassessment has to be based on fulfillment of certain pre-conditions and f 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 in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 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 live link will:41 1e formation. of the belief”

8. In the present facts, we note that the Assessing Officer during the course of regular assessment proceedings leading to the assessment order dated 30 January 2018, on -basis of the profits and loss account and balance sheet and the practice for the earlier years i.e. Assessment Year 2013-14 had issued notice on 25 September 2017 to the Petitioner to show cause why the amount of Rs. 47.04 crores being claimed as book depreciation on intangibles should not be disallowed to determine book profits under Section 115JB of the Act. The above query of the Assessing Officer was responded to by the Petitioner in great detail by its letters dated 10 October 2017 and 21 December 2017. It justified its claim for deductions by placing reliance upon the decisions of the Courts. in support of its contention that they are entitled to deduction of the current years depreciation from the net profit to arrive at the book profits under Section 1 15JB of the Act. It was also explained that under subsection 6 of Section 211 of the Companies Act; reference to a balance sheet or profit and loss account would also include any notes thereto or documents annexed thereto. Thus the notes to the account should be taken into account to determine the net profits for working out the book profits in terms of Section 1 15JB of the Act. The Assessing Officer thereafter proceeded to pass an assessment order dated 30 January 2018 under Section 143(3) of the Act and. did not make the proposed dis-allowance.

10. It is undisputed position before us, that query was raised on the very issue of reopening during regular Assessment proceedings. The parties haft responded to it and the Assessment Order dated 30 January 2018 makes no reference to the above issue at all. However, once .a . query has been raised by the Assessing Officer during the assessment proceedings and the assessee has responded to that query, it would necessarily follow, as held by our Court that the Assessing Officer has accepted the Petitioner’s/Assessee’s submissions, so as to not deal with that issue in the assessment order. In fact, our Court in GKN Sinter Metals Ltd. V/s. Ms. Ramapriya Raghavan, Assistant .Commission.er of Income Tax, Circle 2(1) (371) ITR 225 had occasion to dealt with the similar/identical submissions on behalf of the Revenue .viz., that an assessment .order passed under Section 143(3) of the Act does not reflect any consideration of the issue, it must follow that no opinion was formed. by the. Assessing Officer in the regular assessment proceedings. This submission was negatived by this Court by, observing as follows :-

14. According to the Revenue, it could only .be when the assessment order contains discussion with regard to particular claim can it be said that the Assessing Officer had formed an opinion with regard to the claim made by the assessee. This Court in Idea Cellular Ltd. v/s. Deputy Commissioner of Income Tax 301 ITR 407 has expressly negatived on identical contention on behalf the Revenue. The Court held that once all the material was placed before the Assessing. Officer and he chose not to refer to the deduction/ claim which was being allowed in the assessment order, it could not be the that the Assessing Officer had not applied his mind ‘while passing the assessment order. Moreover, in this case, it is evident from the letter dated 6th August, 2007 addressed by the Assessing Officer to the, Petitioner containing the reasons recorded for issuing the impugned notice also record the fact that during the regular assessment proceedings, the Petitioner has been asked to furnish details in support of the claim for exemption under Section 801A/IB of the Act. The letter further records that the details sought for were furnished and it is now observed that there has been a disproportionate distribution of expenses between various units belonging to the Petitioner for claiming deduction under Section 801A/IB of the Act. This is a further indication of the fact that the Assessing Officer had during the regular assessment proceedings for Assessment Year 2002-03 sought information in respect of the allocation of expenses and the explanation offered by the Petitioner was found to be satisfactory. This is evident from query dated 27th December, 2004 and the Petitioner’s response to the same on 25th January, 2005 explaining the manner of distribution of common expenses for delaying the process of claiming deduction under Section 801A/IB of the Act. All this would indicate that Assessing Officer had formed an opinion while passing the order dated 9th March, 2005. This Court in Aroni Commercials Ltd v/s. Assistant Commissioner of Income Tax 367 ITR 405 had occasion to consider somewhat similar submission made by the Revenue and negatived the same by holding that when a query has been raised with regard to a particular issue during the regular assessment proceedings. it must follow that the Assessing Officer had applied his mind and taken a view in the matter as is reflected in the Assessment. Order. Besides, the manner in which an Assessing Officer would draft/frame his order is not within the control of an assessee. Moreover, if every contention raised by the assessee which even if accepted is to be reflected in the assessment order, then as observed by the Gujarat High Court in CIT Nirma C1/2ernical.s. Ltd. 305 ITR 607, the order would result into an epic tome. Besides, it would be impossible for the Assessing Officer to complete all the assessments which have to under gone scrutiny at its hand In the above view, it is clear that once a query has been raised during the assessment proceedings and the Petitioner has responded to the query to the satisfaction of the Assessing Officer as is evident from the fact that the Assessment Order dated 9th March, 2005 accepts the Petitioner’s claim for deduction under Section 801A/1 B of the Act. It must follow that there is due application of mind by the Assessing Officer to the issue raised.

The above observations apply on all fours to this Petition, so far as the Revenue’s submission of no change of opinion is concerned.

11. The further submission of Mr. Waive that in the absence of the Assessing Officer adjudicating upon the issue it cannot be said that the Assessing Officer had formed an opinion during the regular assessment proceedings leading to the order dated 30 January 2018 An adjudication would only be on such issue where the assessee’s submissions are not acceptable to the Revenue, then the occasion to decide a list would arise i.e. adjudication. However, where the Revenue accepts the view propounded by the assessee in response to the Revenue’s query, the Assessing Officer has certainly to form an opinion whether or not the stand taken by the assessee is acceptable. Therefore, it must follow that where queries have been raised during the assessment proceedings and the assessee has responded to. the same, then the non-discussion of the same or non-rejection of the response. of the assessee would necessarily mean that the Assessing Officer has formed an opinion accepting the view of the Assessee. Thus an opinion is formed during the regular Assessment proceedings, bars the Assessing Officer to reopen the same only on account of a different view.

12. Thus we find that the reasons in support of the impugned notice is the very issue in respect of which the Assessing Officer has raised the query dated 25 September 2017 during the assessment proceedings and the Petitioner had responded to the same by its letters dated 10 December 2017 and 21 December 2017 justifying its stand. The non-rejection of the explanation in the Assessment Order would amount to the Assessing Officer accepting the view of the assessee, thus taking a view/forming an opinion. Therefore, in these circumstances, the reasons in support of the impugned notice proceed on a mere change of opinion and therefore, would be completely without jurisdiction in the present facts. Accordingly, the impugned notice dated 27 March 2019 is quashed and set aside.”

3.1.4 In the instant case, the impugned document on the basis of which reassessment proceedings were initiated was already on record of the A.O and the same has been provided by the appellant during original assessment proceedings. This fact has been admitted by the AO in reasons recorded on 28.02.2014 and in reply to objections raised by the assessee dated 24.03.2014. Further, the audit report was filed by the assessee wherein related party transactions including the transaction in question, was also reported. The AO was satisfied on this issue during the original assessment proceedings and therefore, no ‘adverse had been taken. In such a scenario, Id. AO not having any fresh, information/material in his possession which could be formed his belief about escapement of income. In view of the above judgment of Hon’ble Supreme Court and many other judicial pronouncements, it is well settled position that mere fresh application of mind to the same set of facts does not confer jurisdiction on the AO to assume jurisdiction u/s 147 of the Act and to issue notice u/s 148 of the Act. This amounts to change of opinion on the basis of which any assessment cannot be reopened. In the light of these discussions the assessment framed u/s 143(3) r.w.s 147 of the Act is not. sustainable in the eyes of law.

3.1.5 Another moot question which arises here is the applicability of first proviso to section 147 of the Act. As per the first proviso to section 147 of the Act; where an assessment under sub section (3) of section 143 or section 147 of the Act has been made for the relevant assessment year, no action shall be taken under section 147 of the Act 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 of the Act or in response to a notice issued under sub-section (1) of section 142 of the Act or section 148 of the Act or to disclose fully and truly all material facts necessary for the reassessment, for that assessment year. Section 149 of the Act deals with the time limit for notice under section 148 of the Act. As per clause (a) of sub-section (1), no notice under section 148 of the Act shall be issued for the relevant assessment year, if four years have elapsed from the end of the relevant assessment year unless the case falls under clause (b). Clause (b) says that no notice shall be issued if four years have elapsed but not more than six years have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year.

Insofar the present case is concerned, the assessment year is 2007- 08. The assessment year ends on 31.03.2008. In this case impugned notice under section 148 of the Act was issued on 22.03.2013. Therefore, it is a case of re-opening of assessment under section 149 (1) (b) of the Act after expiry of four years but before expiry of six years. In such a case, the first condition for invoking section 147 of the Act is that the ld. AO must have reason to believe. that income chargeable to tax has escaped assessment for the relevant assessment year. The second condition is that the AO must arrive at the satisfaction that income chargeable to tax has escaped assessment for the said assessment year by reason of the failure on the part of the assessee to make a return under section 139 of the Act or to respond to a notice under section 142-(1).of the Act or section 148 of the Act or due to the failure on the part.. of the assessee to disclose fully and truly all material facts necessary. for -his assessment for that assessment year. The two key and crucial expressions appearing in section 147 of the Act are “reason to believe” and “failure to disclose fully and truly all material facts necessary for assessment”. These two expressions were examined and interpreted in great detail by Hon’ble Supreme Court in ITO vs. Lalchmani Mewal Das, 103 ITR 437 (SC). Hon’ble Court in the said judgment has considered validity of notice u/s 148 of the Act in respect of an assessment beyond the period of four years but within a period of eight years (now six years) from the end of the relevant year, which is also a fact of the instant case. Hon’ble Court observed that in such a case, where notice was issued beyond four years but within period of eight years (no-k six years), two 4a conditions would have to be satisfied by the AO before acquires jurisdiction to issue notice u/s 148 of the Act. These two conditions are

(i) He must have reason to believe that income chargeable to tax has escaped assessment; and

(ii) He must have reason to believe Mat such income has escaped assessment by reason of the omission or failure on the part of the assessee to make a return under section. 139 for the assessment year under consideration or to disclose fay and truly all material facts necessary for his assessment for that year.

Both the requisite conditions must co-exit in order to confer jurisdiction by the AO. Hon’ble Court observed that duty is also cast upon the assessee to make a true and full disclosure of the Primary facts at the time of the original assessment. Production of books of accounts before the AO or other evidence from which material evidence with due diligence could have been discovered by the AO will not necessarily amount to disclosure contemplated by law but the duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once, the assessee has discharged its onus of furnishing true and primary facts, it is for the AO to draw the correct inference from the primary facts.

Furthermore, the grounds or reasons which led to formation of the belief that income chargeable to tax has escaped assessment must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. The reasons for formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational

connection postulates that there must be a direct nexus or live link between the material coming to the notice of the AO and the formation or his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure w disclose fully and truly all material facts.

3.1.6 In the instant case, the impugned document on the basis of which reassessment proceedings were initiated was already on record of the AO and the same had been provided by the appellant during original assessment proceedings. This fact has been admitted by the AO in reasons recorded on 28.02.2014 and in reply to objections raised by the assessee dated 24.03.2014. Further, the audit report was filed by the assessee wherein related party transactions including the transaction in question, was also reported. The AO has not raised any doubt on this issue during the original assessment proceedings. Thus, there is no failure on the part of the assessee to make full and true disclosure of material fact necessary for the original assessment. However, the Id AO has assumed jurisdiction forming belief by observing that the assessee has credit an amount of Rs. 1,64,20,225/- to the account of M/s Sunil Steels and thereby, suppressing sales to this extent. There is no nexus or live link between the material with the AO and the formation of belief on the basis of the same. The passing such entry does not mean that there is escapement of income within the meaning of section 147 of the Act. No other material/evidence has been mentioned in the reasons recorded which conclusively suggest the such claim of the assessee was bogus and hence, there was income escaped from assessment. Allowing the discount/deduction at the year end cannot form reason to believe. The AO had no material to reason to believe that there was income escaped from the assessment. Hon’ble Bombay High Court in the case of Hindustan Liver Limited 268 ITR 332 has held as under:

The reason recorded for issuing notice provide the link between conclusion and evidence. The reason recoded must be based on |evidence. The Assessing Officer in the event of ‘challenge to the reason, must be able to justify the same based on material available, on record. He must disclosed in the reason a to which fact or material not disclosed by the assessee fully and truly was necessary for assessment of that year, so as to establish the vital link between the reasons and evidence.”

Therefore, reasons recorded for reopening of completed assessment lead to the fact that the impugned assessment has been reopened. for the purposes of making roving and fishing enquiry which is not permissible as per the provisions of section 147 of the Act. This view is also supported by various judicial pronouncements. In the case of Madhya Pradesh Industries Limited 57 ITR 637 (SC), Hon’ble Apex Court has held that fishing or roving enquiry with a hope that it might lined the AO somewhere wherefrom he could find out that income chargeable to tax has escaped assessment, is not permissible us 147 of the Act. In the instant case, in the reasons recorded, the AO has not referred any material which has come on the record subsequently, and has not mentioned as to which material fact were not disclosed by the assessee. Further, genuineness of amount of discount given to M/s Sunil Steels has also not been challenged by the AO. Thus, there was no new material before the AO for making belief u/s 147 of the Act and thus, the assessment was reopened for nothing but to make roving and fishing enquiries for making addition of Rs. 1,64,20,225/-. This is not permissible u/s 147 of the Act and as per the judicial pronouncements mentioned above.

In the facts and in the circumstances, the A.O has failed to explain how the appellant has not disclosed the true and primary facts during original assessment proceedings even when the document on the basis of which reassessment proceedings were initiated was furnished by the assessee during original assessment proceeding. The transactions were duly disclosed in the Audit Report. Thus, there exists a serious lacuna in the findings of the AO. In such a scenario, Id. AOC not having ‘any fresh information/material in his possession, merely on assumption formed his belief about escapement of income which is not sustainable in law. Thus, assumption of jurisdiction by Id. AO for roving and fishing enquiries is not sustainable as per the provisions of section 147 of the Act.”

8. The revenue being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.

9. We have heard the ld. Authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions.

10. As the revenue is, inter alia, aggrieved with the order of the CIT(Appeals) on the ground that he had held that the A.O., in the absence of any fresh information/material coming in his possession after the framing of the original assessment, which would justify the formation of a bonafide belief that its income chargeable to tax had escaped assessment, had wrongly assumed jurisdiction and reopened the concluded assessment of the assessee company, therefore, we shall first deal with the same.

11. On perusal of the assessment records as were called for and produced by the department in the course of the hearing of the appeal, it transpires that as per the “reasons to believe,” the reopening of the concluded assessment of the assessee company was based on re-appreciation of certain documents available on record. For the sake of clarity, the “reasons to believe” that had formed the very basis for reopening the case of the assessee company reads as under:

As observed by us hereinabove, the A.O. after the culmination of the original assessment which his predecessor had framed vide his order passed u/s. 143(3) of the Act dated 31.12.2009, referred to the records of the assessee company and observed that the assessee company had credited an amount of Rs.1.64 crore (supra) on 31 .03.2007 in the account of M/s Sunil Re-roller and Steels Pvt. Ltd. i.e., its sister/associate concern that was covered under the specified persons u/s.40A(2)(b) of the Act. The A.O. further observed that the aforementioned credit pertained to the discount of Rs.1 .64 crore (supra) was allowed to the aforementioned sister concern towards quality difference @Rs.1000/- PMT of sponge iron purchased by the said sister concern. Referring to the assessee company’s profit and loss account, the A.O. observed that the aforesaid amount of discount allowed by the assessee company towards quality difference was not found debited in the same. Backed by the aforesaid facts borne from the record, it was observed by the A.O that the assessee company had directly passed entries qua the aforesaid amount of Rs.1.64 crore (supra) in the account of the aforementioned party on 31.03.2007. Considering the aforesaid facts, the A.O held a conviction that as the assessee company had, by crediting the account of the aforesaid sundry debtor, i.e. sister concern by an amount of Rs.1.64 crore (supra), suppressed both its sales and debtor by the said amount, therefore, its income to the said extent had escaped assessment. Further, it was observed by the A.O that as escapement of income had occasioned due to the failure of the assessee company to disclose fully and truly all material facts that were necessary for assessment, therefore, its case could validly be reopened u/s.147 of the Act.

12. On the basis of the aforesaid facts, it can safely be gathered that the reopening of the concluded assessment of the assessee company was based on the same set of facts as were available with the A.O. while framing the original assessment. To sum up, no fresh material/ documents had come into possession of the A.O. after the culmination of the original assessment proceedings, which would have vested jurisdiction with him to reopen the concluded assessment of the assessee company. Our aforesaid conviction is duly fortified on a bare perusal of the “reasons to believe”, which clearly reveals that the reopening of the concluded assessment of the assessee company was based on a mere re-appreciation of the facts available on record by the successor A.O. The Ld. Departmental Representative (“D.R”, for short) on being confronted with the aforesaid factual position could not rebut the same.

13. Considering the fact that the case of the assessee company had been reopened with the purpose to re-appreciate the facts which were already available on record and not on the basis of any fresh material/document coming into the possession of the A.O after the culmination of the original assessment by his predecessor vide order u/s.143(3) dated 31.12.2009, which would reveal that any income of the assessee company chargeable to tax had escaped assessment, we find substance in the claim of the Ld. AR that the A.O. had clearly traversed beyond the scope of his jurisdiction and had wrongly reopened the concluded assessment of the assessee company under Sec. 147 of the Act. In fact, we are unable to comprehend what new “material” or “information” had come up before the A.O., which justified the reopening of the concluded assessment of the assessee company. We are afraid that re-appreciation of the facts already available on record before the A.O. while framing the original assessment is not permissible u/s 147 of the Act. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Bombay in the case of Asian Paints Ltd. Vs. DCIT (2008) 308 ITR 195 (Bom). The Hon’ble High Court, by drawing support from the landmark judgment of the “Full bench” of the Hon’ble High Court of Delhi in the case of CIT Vs. Kelvinator of India (2002) 256 ITR 1 (Del) [which thereafter had been approved by the Hon’ble Apex Court in CIT Vs. Kelvinator of India (2010) 320 ITR 561 (SC)] had observed that the department cannot take recourse to the provisions of Sec. 147 of the Act for the failure of the A.O to apply his mind in the original assessment proceedings to the material which according to him, is relevant and which was available on record. Relying on the observations of the “Full bench” of the High Court of Delhi in CIT Vs. Kelvinator of India Ltd. (supra), the Hon’ble High Court of Bombay in Asian Paints Ltd. Vs. DCIT (supra), had observed that where according to the A.O he had failed to apply his mind to the relevant material in making the assessment order, he cannot take advantage of his own wrong and reopen the assessment by taking recourse to the provisions of Sec. 147. The Hon’ble High Court had further observed that fresh application of mind by the A.O to the same set of facts for the reason that some material that was available on record while framing the original assessment was inadvertently excluded from consideration would not justify reopening of the assessment u/s 147 of the Act. For the sake of clarity, the observations of the Hon’ble High Court of Bombay in the case of Asian Paints Ltd. Vs. DCIT (supra) are culled out as follows:

“7. We have heard the learned counsel appearing for both sides. We have also gone through the judgments on which reliance was placed by the learned counsel appearing for both sides.

8. In the order rejecting the objection filed by the petitioner to the notice under section 148, respondent No. 1 has observed “verification of assessment record reveals that the said details were called for but inadvertently the same were not taken into account while framing the assessment and, therefore, it cannot be said that there is a change of opinion.” According to respondent No. 1, thus, the relevant material was available on record, but he failed to apply his mind to that material in making the assessment order. The question is, can respondent No. 1 take recourse to the provision of section 147 for his own failure to apply his mind to the material which, according to him, is relevant and which was available on record. We find that this situation has been considered by the Full Bench of the Delhi High Court in its judgment in the case of CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 and the Full Bench has observed thus (page 19) :

“The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section

143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”

9. It is clear from the observations made above that the Full Bench of the Delhi High Court has taken a view that in a situation where according to the Assessing Officer he failed to apply his mind to the relevant material in making the assessment order, he cannot take advantage of his own wrong and reopen the assessment by taking recourse to the provisions of section 147. We find, ourself, in respectful agreement with the view taken by the Full Bench of the Delhi High Court.

10. It is further to be seen that the Legislature has not conferred power on the Assessing Officer to review its own order. Therefore, the power under section 147 cannot be used to review the order. In the present case, though the Assessing Officer has used the phrase “reason to believe”, admittedly between the date of the order of assessment sought to be reopened and the date of formation of opinion by the Assessing Officer, nothing new has happened, therefore, no new material has come on record, no new information has been received, it is merely a fresh application of mind by the same Assessing Officer to the same set of facts and the reason that has been given is that the some material which was available on record while assessment order was made was inadvertently excluded from This will, in our opinion, amount to opening of the assessment merely because there is change of opinion. The Full Bench of the Delhi High Court in its judgment in the case of Kelvinator [2002] 256 ITR1 referred to above, has taken a clear view that reopening of assessment under section 147 merely because there is a change of opinion cannot be allowed. In our opinion, therefore, in the present case also, it was not permissible for respondent No. 1 to issue notice under section 148.

11. In the result, therefore, petition succeeds and is allowed. Rule is made absolute in terms of prayer clause (a) with no order as to costs.”

(emphasis supplied by us)

At this stage, it would be relevant to point out that the view taken by the “Full bench” of the Hon’ble High Court of Delhi in CIT Vs. Kelvinator of India (2002) 256 ITR 1 (Del), that the failure of the A.O to consider certain material that was available on record while framing the original assessment cannot justify the reopening of its concluded assessment, as the same would amount to opening of the assessment on the basis of a “change of opinion”, which is not allowed as per the mandate of law, had thereafter been approved by the Hon’ble Apex Court in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC). The observations of the “Full bench” of the Hon’ble High Court of Delhi in CIT Vs. Kelvinator of India (2002) 256 ITR 1 (Del), which thereafter had been approved by the Hon’ble Apex Court in 320 ITR 561, are culled out as under (relevant extract):

“10. It is further to be seen that the legislature has not conferred power on the AO to review its own order. Therefore, the power under s. 147 cannot be used to review the order. In the present case, though the AO has used the phrase “reason to believe”, admittedly between the date of the order of assessment sought to be reopened and the date of formation of opinion by the AO, nothing new has happened, therefore, no new material has come on record, no new information has been received; it is merely a fresh application of mind by the same AO to the same set of facts and the reason that has been given is that the some material which was available on record while assessment order was made was inadvertently excluded from consideration. This will, in our opinion, amount to opening of the assessment merely because there is change of opinion. The Full Bench of the Delhi High Court in its judgment in the case of Kelvinator (supra) referred to above, has taken a clear view that reopening of assessment under s. 147 merely because there is a change of opinion cannot be allowed. In our opinion, therefore, in the present case also, it was not permissible for respondent No. 1 to issue notice under s. 148″.

14. At this stage, we may herein observe, that as per the mandate of law, even where a concluded assessment is sought to be reopened by the A.O within a period of 4 years from the end of the relevant assessment year, it is a must that the A.O has fresh material or information with him, that had led to the formation of belief on his part that the income of the assessee chargeable to tax has escaped assessment. Our aforesaid view is fortified by the judgments of the Hon’ble High Court of Bombay in the case of NYK Lime (India) Ltd. Vs. DCIT (No.2) [2012] 346 ITR 361 (Bom) and Purity Tech Textile Pvt. Ltd. Vs. ACIT & Anr. [2010] 325 ITR 459 (Bom).

15. Alternatively, we concur with the view taken by the CIT(Appeals) that the reopening of the concluded assessment of the assessee company is also hit by the “1^st proviso” to Sec. 147 of the Act. Admittedly, the original assessment was framed in the case of the assessee company for the year under consideration, i.e., A.Y 2007-08 vide order passed under Sec. 143(3) of the Act, dated 31.12.2009. The concluded assessment of the assessee was thereafter reopened vide notice issued under Sec. 148 of the Act, dated 22.03.2013. It is the claim of the ld. A.R. that the A.O. had exceeded his jurisdiction and framed the reassessment order under Sec. 143(3) r.w.s 147, dated 28.03.2014, inter alia, for the reason that the same had been passed in violation of the mandate of the “1st proviso” of Sec. 147 of the Act. Admittedly, as stated by the Ld. A.R and, rightly so, in a case where an assessment had earlier been made under Section 143(3) of the Act, and action thereafter is sought to be taken for the reopening of the case u/s.147 after the expiry of four years from the end of the relevant assessment year, then, it would be necessary that the twin conditions contemplated in the statutory provision are satisfied, i.e. (i). the AO must have reason to believe that income chargeable to tax has escaped assessment; AND (ii). he must also have a reason to believe that such escapement had occurred by reason of failure on the part of the assessee for either of the two conditions, viz. (a). to make a return of income under Section 139 or in response to notice issued under sub-section (1) of Section 142 or Section 148; or (b). to disclose fully and truly all material facts necessary for his assessment for that purpose.

16. Coming back to the two conditions carved out in the “1st proviso” to 147 of the Act, as it is neither the case of the department nor a fact discernible from the record that the income of the assessee chargeable to tax had escaped assessment for the reason that there was any failure on its part to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148, therefore, the first condition contemplated in the “1st proviso” to Sec. 147 is not satisfied by the assessee company.

17. We shall now advert to the second condition contemplated in the “1st proviso” to Sec. 147 of the Act, i.e., as to whether or not there has been any failure on the part of the assessee to disclose fully and truly all material facts as were necessary for its assessment for the year under consideration, i.e., A.Y. 2007-08. On a perusal of the record, it transpires that the assessee company had disclosed fully and truly all the material facts regarding the sale transactions that it had made during the year to its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd. (supra). We may herein observe that the Hon’ble Supreme Court in the case of New Delhi Television Ltd. vs. Deputy Commissioner of Income Tax (2020) 116 Taxmann.com 151 (SC), had, inter alia, held that though the assessee is obligated to disclose the “primary facts” but it is neither required to disclose the “secondary facts” nor required to give any assistance to the A.O by disclosure of the other facts and it is for the A.O to decide what inferences are to be drawn from the facts before him. It was observed by the Hon’ble Apex Court that the extended period of limitation for initiating proceedings under the “1^st proviso” of Section 147 of the Act would only get triggered where the assessee had failed to disclose fully and truly all material facts necessary for its assessment. Now, in the case before us, we are unable to comprehend what facts the assessee company had failed to disclose which would have otherwise justified bringing its case within the realm of the extended time period contemplated in the “1st proviso” of section 147 of the Act. As the assessee company had disclosed fully and truly all the material facts as regards the aforesaid issue, i.e., the sales made to its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd. (supra) as were necessary for its assessment for the year under consideration, i.e., AY 2008-09; therefore, it could by no means be held to be in default for the purpose of bringing it within the sweep of “1st proviso” of Section 147 of the Act.

18. Analyzing the scope of the “1^st proviso” to Sec. 147 of the Act, which contemplates that where assessment in the assessee’s case had been framed u/s 143(3) of the Act, then no action under Sec. 147 shall be taken in its case after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax had escaped assessment for such assessment year for failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, the Hon’ble Supreme Court had dismissed the Special Leave Petition (SLP) filed by the revenue in ACIT Vs. Marico Limited, 117 taxmann.com244 (SC), and impliedly approved the decision of the Hon’ble High Court of Bombay in the case of Marico Limited Vs. ACIT, WP NO.1917 of 2019 dated 21.08.2009. The Hon’ble High Court of Bombay in Marico Limited Vs. CIT (supra) [as approved by the Hon’ble Apex Court] had observed as follows:

5. Upon hearing learned counsel for the parties and upon perusal of the documents and record, what we gather is that the notice of reopening of assessment has been issued beyond the period of four years from the assessment year. The reasons recorded by the Assessing Officer are elaborate and refer to various issues on which he wishes to carry out the reassessment. However, the central theme which passes though all these issues is that the Assessing Officer had gathered the information and material from the record of the assessment. For example in Paragraph No. 3 of the reasons which contains several sub-paragraphs which are different elements of the grounds for reassessment begins with the expression “On perusal of the record for the assessment year 2011-12, the following issues were found”. Thus, with reference to various issues arise on the basis of the perusal of the record of the assessment year in question. Clearly, therefore, there is no material alien to the record which the Assessing Officer has referred to for issuing the impugned notice. Further, almost for every ground which is part of various sub-paragraphs of Paragraph No. 3, he has referred to either scrutiny or verification of the case records. In clear terms, therefore, the Assessing Officer was acting on the information available from the record of the assessment.

6. As is well known, in an instance where the Assessing Officer exercises power of reassessment beyond the period of four years from the end of relevant assessment year, an essential requirement is that the escapement of income chargeable to tax is due to the failure on the part of the assessee to disclose truly and fully all material This is part of section 147 of the Act itself and is on number of occasions by various judgments of High Court and Supreme Court held to be mandatory pre-requirement. In view of such settled law, it is not necessary to refer to any judgment. Revenue is unable to bring to our notice any aspect or element which did not form part of the record and on the basis of which from the reasons recorded, it can be culled out that the Assessing Officer had formed a belief that income chargeable to tax had escaped assessment. In clear terms therefore, there was no failure on the part of the assessee to disclose truly and fully all material facts.

7. Counsel for the revenue however submitted that one of the issues raised by the Assessing Officer is that the activity carried on by the assessee does not amount to manufacturing activity. In the present petition, it is not necessary for us to comment on this aspect of the matter. What is important however is such belief also the Assessing Officer has formed on the basis of material already on record. Looked from any angle, the Assessing Officer cannot justify issuing the notice of reopening of assessment beyond the period of four years from the end of relevant assessment year.

8. Under the circumstances, impugned notice is quashed. Petition allowed and disposed of accordingly.

Considering the aforesaid settled position of law, we are of the considered view that as in the case before the Hon’ble Apex Court in Marico Limited (supra), the concluded assessment in the case of the present assessee company before us for the year under consideration, i.e., A.Y 2007-08 had been reopened vide notice u/s 148, dated 22.03.2013, i.e., beyond 4 years from the end of the relevant assessment year, for the purpose of reappreciating the material that were available on the assessment record while framing the original assessment u/s 143(3), dated 31.12.2009, i.e. for reappreciating the copy of account of M/s Sunil Re-roller and Steels Pvt. Ltd., Raipur (supra) that was filed by the assessee company during the original assessment proceedings, and not for any failure on the part of the assessee company to fully and truly disclose all material facts necessary for its assessment, therefore, as observed by the CIT(Appeals) and, rightly so, the reopening of the concluded assessment of the assessee company would be clearly hit by the “1^st proviso” to Sec. 147 of the Act.

19. We have thoughtfully considered the aforesaid issue and concur with the view taken by the CIT(Appeals) that the assessment of the assessee company for AY 2007-08 that was earlier framed under Sec. 143(3), dated 31.12.2009, de hors any failure on the part of the assessee company to fully and truly disclose all material facts necessary for its assessment could not have been reopened by the AO vide Notice u/s 148, dated 22.03.201 3, i.e, after the expiry of four years from the end of the relevant assessment year.

20. On the basis of our aforesaid deliberations, we find no infirmity in the view taken by the CIT(Appeals), who had rightly concluded that the A.O had wrongly assumed jurisdiction and reopened the concluded assessment of the assessee company on two fold reasons, viz. (i). that fresh application of mind by the A.O to the same set of facts for the reason that some material that was available on record while framing the original assessment was inadvertently excluded from consideration would not justify reopening of the assessment u/s 147 of the Act; and (ii). that the concluded assessment of the assessee company for the year under consideration, i.e., A.Y 2007-08, had been reopened, vide notice u/s 148, dated 22.03.2013, i.e., beyond 4 years from the end of the relevant assessment year, for the purpose of reappreciating the material that was available on the assessment record while framing the original assessment u/s 143(3), dated 31 .12.2009 and not for any failure of the assessee company to fully and truly disclose all material facts necessary for its assessment; therefore, the reassessment order passed by him u/s. 147 r.w.s 143(3), dated 28.03.2014, cannot be sustained for want of valid assumption of jurisdiction, thus, uphold the same. Thus, the Ground of appeal No.1 raised by the revenue is dismissed in terms of our aforesaid observations.

21. Although we have upheld the order of the CIT(Appeals) to the extent that he had quashed the assessment for want of valid assumption of jurisdiction by the A.O for reopening the concluded assessment of the assessee company u/s.147 of the Act, but as the revenue has also assailed the view taken by the CIT(Appeals) wherein he had vacated the disallowance of Rs.1 .64 crore (approx.) after considering the merits of the case, therefore, for the sake of completeness, we shall now deal with the same.

22. On a perusal of the order of the CIT(Appeals), it transpires that he had after quashing the assessment for want of valid assumption of jurisdiction by the A.O u/s.147 of the Act, thereafter, proceeded with the merits of the case and had found favour with the contentions advanced by the assessee that no adverse inference even otherwise on the said count were liable to be drawn in its hands. For the sake of clarity, the relevant observations of the CIT(Appeals) to the extent he had concluded that the claim of the assessee company that on merits no addition/disallowance was called for in its case, are culled out as under:

“3.1.7 As far as merits of the case are concerned, the assessee had given discount to M/s Sunil Steels on account of inferior quality of product and quantity discount. The assessee and. M/s Sunil Steels entered into an agreement dated 01.04.2006 for supply of raw material and as per agreement executed between both the parties; the assessee has provided sponge iron of inferior quality which is 5-8% of low grade quality. As per agreement a discount of Rs. 1,000/- per MT and quantity discount, if, quantity purchased was more than 10000 MT shall be provided by the. assessee. During the year under consideration M/s Sunil Steels purchased 16433.32 5 MT of sponge iron on which, as per agreement, discount of 6433.325 MT was given by the assessee which amounts to Rs: 77,19,990/-. Further, quality discount of Rs. 87,00,230/- was given by the assessee. Therefore, a total discount of Rs. 1,64,20,225/- was given by the assessee to M/s Sunil Steels. The Id AO during the course of reassessment proceedings observed that the entire discount was provided by debiting a singly entry on 31.03.2007, however, the material was sold throughout the year and the accounting for the same ought to have been done after every sale transaction. The through its written submission has explained that the quantity discount, as per agreement, could have only been calculated at the year end and for that reason a single entry was passed at the end of the year i.e. on 3 1.03.2007. Further, the AO has alleged that the assessee has sold sponge iron to M/s Sunil Steel at low rates as compared to other business concerns. The average selling rate of sponge iron to M/s Vandana Global Ltd was at Rs.2 1,976.77, to M/s Godawari power & Ispat Lid at Rs. 15,101/- and to M/s Silphy Steel Pvt Ltd at Rs. 20,242.74. However, the average selling rate to M/s Sunil Steel was at Rs. 12,876.99 before giving discount of Rs. 1,000/-on account of inferior quality of material. The assessee before the AO as well as before me through its written submission has explained that it had sold 32365.03 MT of sponge iron to various concerns during entire year, out of which 16433.325 Mt was alone sold to M/s Sunil Steel which is more than 50% of total sales. Further, the material sold to M/s Sunil Steel was of inferior quality i.e. 5-8% of low grade. The assessee further submitted that the average selling rate to M/s Sunil Steel was at Rs. 10630/- per MT and assessee had sold 1636.92 MT of inferior quality of goods to M/s Sunil Steels, therefore, quality discount of Rs 5,315/- (50% of average selling rate) was given by the assessee. Considering the entire factual matrix, I am of the view that M/s Sunil Steel is the High Value Customer of the assessee company. It is a traditional practice being adopted by various business houses to give discount or free-bees to high value clients in the interest of business and the appellant did not violate any law in doing so. However, as per accounting principle, loss of one person is profit of the other. Therefore, the accounting entry of discount offered by the assessee should find place as profit in the books of M/s Sunil Steel. The assessee during appellate proceedings has strongly contended that the assessee has passed a discount entry in its books of accounts and a similar entry was passed by M/s Sunil Steels in its books of accounts. Therefore, there is no suppression of sales by the assessee or purchase by M/s Sunil Steel in support assessee has filed copies of sales account in its books and relevant purchase account in the books of M/s Sunil Steel. On perusal of the ledger account it was observed that the assessee has passed credit journal entry of Rs. 1,64,20,225/- on 31.03.2007 and similarly M/s Sunil Steel passed a debit journal entry of Rs. 1,64,20,225/- on 3 1.03.2007. The AO has not brought any material on record to discredit the evidences filed submission made during assessment proceedings. Genuineness of this entry has not been doubted in the assessment proceedings by bringing any cogent material on record. Therefore, it cannot be said that the assessee has suppressed its sales by way of giving discount to M/s Sunil Steel. Thus, in totality the allegation made by the AO does not hold ground and therefore, entire addition made on this account amounting to Rs.1,64,20,225/- is directed to be deleted.”

23. We have thoughtfully considered the observations of the CIT(Appeals) in the backdrop of the contentions advanced by the Ld. Authorized Representatives of both the parties and find substance in the same. As it is a matter of fact borne from the record that the discount allowed by the assessee company to its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd was recorded in the latter’s books of account, therefore, the said fact in itself dislodges the doubts drawn by the A.O as regards the authenticity of the aforesaid claim of the assessee. As is discernible from the assessment records that were produced during the course of the hearing of the appeal by the Ld. DR (Pages 14 to 34 of the assessment records), we find that the assessee company had, in the course of proceedings before the A.O., placed on record a copy of its ledger account as was appearing in the books of account to its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd. On a perusal of the ledger account of the assessee company in the books of M/s Sunil Re-roller and Steels Pvt. Ltd, it transpires that the latter had debited the account of the assessee company by the aforesaid amount of Rs.1 .65 crore (supra). It is, thus, a matter of fact discernible from the record that the claim of the assessee company that it had allowed a discount to its sister concern is duly corroborated by the corresponding claim of its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd, which had duly incorporated the said discount in its books of account.

24. As per the assessee’s paper book, it is revealed that the aforesaid sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd had filed its return of income for the year under consideration i.e., A.Y.2007-08 declaring an income of Rs.19.87 lacs (approx.), Page 119 of APB, while the assessee company had declared its income at Rs.55,755/-. Considering the aforesaid fact, we find substance in the claim of the Ld. AR that as the aforesaid sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd was in the same tax bracket as in comparison to the assessee company, therefore, the doubt of the A.O that the claim of discount raised by the assessee company was guided by an ulterior motive to suppress its income is clearly dispelled and ruled out.

25. At this stage, we are reminded of the judgment of the Hon’ble High Court of Bombay in the case of Commissioner of Income Tax Vs. Indo Saudi Services (Travel) P. Ltd. (2009) 310 ITR 306 (Bom), wherein it was observed by the Hon’ble High Court that as the revenue was not in a position to point out how the assessee had evaded payment of tax by allegedly making payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal, therefore, its said claim for deduction of commission expenditure could not on the said count be disallowed. For the sake of clarity, the relevant observations of the Hon’ble High Court are culled out as under:

“2. When the matters came up for final hearing, Mr. Vimal Gupta appearing for the appellant stated that though the appeals were admitted on two substantial questions of law, the appellant in both the appeals is pressing only one common question of law which is set out hereunder :

“Whether the incentive commission paid to the sister company which was more than other sub-agents allowable for deduction ?”

3. The relevant facts giving rise to the present appeals are briefly set out hereunder :

(i) The assessee’s business is that of being general sales agents of Saudi Arabian Airlines. The assessee earned commission @ 12 per cent from Saudi Arabian Airlines on the tickets booked/sold by them. The assessee appointed several agents including their sister concern, , M/s Middle East International and paid incentive commission to such agents, by way of handling charges.

(ii) For the asst. yrs. 199 1-92 and 1992-93 the AO by his orders dated 25th March, 1994 and 31st Jan., 1995 respectively held that the incentive commission paid to M/s Middle East International (sister concern of the assessee) was half per cent more than other sub- The AO invoked section 40A(2) of the IT Act and disallowed the excess commission paid to the assessee’s sister concern @ 1/2 per cent. The CIT(A) by orders dated 5th Jan., 1995 and 14th Nov., 1995 confirmed the disallowance for asst. yrs 199 1-92 and 1992-93 respectively.

(iii) The assessee carried the matter further by filing an appeal before the Tribunal. Initially the Tribunal by its common order dated 3rd April, 1997 dismissed the assessee’s appeals for the asst. yrs. 1991- 92 and 1992-93. Thereafter the assessee filed an application under section 254 of the IT Act, 1961 before the Tribunal and Tribunal by its order dated 3rd March, 1999 allowed the said application of the assessee arising out of the Tribunal’s order dated 3rd April, 1997. Thereafter the Tribunal by its order dated 21st Oct., 1999 allowed the appeal of the assessee partly and deleted the additions which were earlier confirmed.

(iv) The appellant (Revenue) being aggrieved by the Tribunal’s order dated 21st Oct., 1999 filed the above appeals, inter alia contending that the Tribunal was not right in law in allowing the assessee’s claim of incentive commission paid to its sister concern which was half per cent more than the other sub-agents and which has been correctly disallowed in terms of section 40A(2)(b) of the Act.

4. We have heard the learned advocates appearing for both sides. We have also perused the order passed by the Tribunal dated 21st Oct., 1999 which is impugned by the Revenue in the present appeals. We find that the following facts were established before the Tribunal and the same have been accepted by the Revenue even before us.

(i) That the assessee apart from paying handling charges @ 9 1/2 per cent to its sister concern, have paid handling charges at the same rate to other agents viz., M/s A.K.Travels, M/s Om Travels and M/s Jet Age Travels.

(ii) For asst. yrs. 1986-87 and 1987-88 the assessee had paid the handling charges @ 10 per cent to the sister concern of the assessee and such charges paid were considered to be reasonable by the

(iii) For asst.yrs. 1989-90 and 1990-9 1 the assessee had reduced the payment of handling charges to 9 1/2 per cent to its sister concern. The AO has considered the payment of commission to the sister concern in the asst. yr. 1989-90 and allowed the claim after due scrutiny. For asst. yr. 1990-9 1 also the claim of the assessee @ 9 1/2 per cent has been allowed though the same has not been dealt with by the AO specifically in the order.

(iv) For asst.yrs. 1993-94 and 1994-95 the assessment has been made by the AO under section 143(3) and handling charges paid to the sister concern @ 9.5 per cent have been considered to be reasonable and allowed.

(v) The sister concern of the assessee M/s Middle East International is also assessed to tax and income assessed for the asst. yr. 199 1-92 is Rs. 9,38,510 and for asst.yr. 1992-93 is Rs. 14,65,880 and the said assessment orders have been placed on record.

(vi) Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax.

5. In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the CIT(A) was wrong in disallowing half per cent commission paid to the sister concern of the assessee during the asst. yrs.1991-92 and 1992-93. The learned advocate appearing for the appellant was also not in a position to point out how the assessee evaded payment of tax by alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal.

6. We, therefore, answer the above question of law raised in these appeals in affirmative and dismiss the above appeals filed by the appellant. There will, however, be no order as to costs.”

Based on the aforesaid observations, an analogy can safely be drawn in the present case, i.e., now when both the assessee company and its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd. are in the same tax bracket; therefore, on a similar footing, the doubts raised by the A.O. about evasion of taxes by the assessee company on the basis of foul arrangement with its sister concern is clearly ruled out.

26. Apropos the adverse inferences which were drawn by the A.O. on the basis of his dissatisfaction as regards the authenticity of the “agreement” dated 01.04.2006 executed between the assessee company and its sister concern, viz. M/s Sunil Re-roller and Steels Pvt. Ltd, we are unable to find substance in the same. On a careful perusal of the aforesaid “agreement,” we find that the same inter alia provides a discount of 50% of the normal price of low-quality sponge iron, i.e., 5% to 8% low-grade (-1) mm sponge iron generated in dust form was to be allowed to the sister concern. Apart from that, it was agreed amongst the parties that a quantity discount of Rs.1000/- PMT was to be allowed to the sister concern in case the quantity of more than the latter during the year lifted 10000 MT. At this stage, we may herein observe that it was also provided that the amount of the aforesaid discount of Rs. 1000/- PMT would be flexible and could be varied as per the mutual agreement amongst the aforesaid parties. Considering the contents of the aforesaid “agreement”, we have no doubt as regards the discount of 50% of the normal price of sponge iron that was allowed by the assessee company to its sister concern towards the same supply of low quality of sponge iron to it.

27. As regards the observation of the A.O that as against the quality discount of Rs.1000 PMT, the assessee company had allowed at the rate of Rs.1200/- PMT, the said variance in our considered view was saved by the flexibility that was allowed as per mutual agreement/consent of the parties as provided in Clause 5 of the “agreement”.

28. Apropos the observation of the A.O as to why the said discount did not find a place in the “books of account” from time to time when the assessee company supplied goods to its sister concern and had been credited in the latter’s account only on the last day of the accounting year, i.e., on 31.03.2007, we concur with the view taken by the CIT(Appeals) that the same was for the reason that as “quantity discount” was only to be allowed if the sister concern lifted more than 10000 PMT sponge iron, and determination of the total amount of sponge iron that was purchased by the sister concern during the year could be arrived at only after end of the financial year. Considering the aforesaid facts, we find no infirmity in the crediting of the amount of discount, e., both quality and quantity discount by the assessee company in the account of the sister concern on the last date of the financial year, i.e., on 31.03.2007.

29. As regards the adverse inferences which have been drawn by the A.O. as regards the authenticity of the “agreement” dated 01.04.2006 for the reason that the names of signatories are not found, we are unable to persuade ourselves to subscribe to the same. As observed by us hereinabove, now when the claim of the assessee company of having allowed discount to its sister concern has duly been corroborated by corresponding entries in the books of account of the said sister concern, therefore, the aforesaid hyper- technical approach adopted by the A.O for dislodging the claim of the assessee cannot be accepted.

30. Also, observation of the A.O. wherein he had rejected the laboratory reports evidencing the fact that low-quality sponge iron was supplied by the assessee company to its sister concern does not find favor with us. On a perusal of the records, we find that though the assessee company had duly placed on record documentary evidence to substantiate the factum of having sold low-quality sponge iron to its sister concern, the same had been rejected by the A.O merely on the basis of doubts and suspicion and is not backed by any cogent reason much the less any material which would dislodge the authenticity of the same.

31. Accordingly, on the basis of our aforesaid deliberations, we find no infirmity in the view taken by the CIT(Appeals) who had rightly concluded that even on merits, the assessee’s claim of having allowed discount of Rs.1 .64 crore (supra) could not have been dislodged by the A.O. We, thus, in terms of our aforesaid observations, uphold the view taken by the CIT(Appeals) as regards the merits of the case. Thus, the Ground of appeal No.2 raised by the revenue is dismissed in terms of our aforesaid observations.

32. In the result, the appeal of the revenue is dismissed in terms of our aforesaid observations.

Order pronounced in Open Court on 12^th October 2023.