ITAT Delhi Quashes Reassessment Beyond Four Years for Lack of Disclosure Failure

Ram Fashion Exports Private Limited Vs DCIT (ITAT Chennai)

Reassessment Beyond Four Years Invalid in Absence of Failure to Fully and Truly Disclose Material Facts – Mere Change of Opinion Not Permissible

The appellant is an exporter of leather footwear. It filed IT return for AY 2013-14 on 29.09.2013. The return was selected for scrutiny under section 142(1) and (2). It replied. Assessing officer passed assessment order under section 143(3) accepting the returned income (but for minor variation). However; notice under section 148 was issued; after expiry of four years; on 14.03.2019. The reasons recorded by the AO prior to re-opening of assessment was scrutiny of case records. Assessment was reopened. Hence; appeal was filed.

Hon’ble ITAT, Chennai set aside the order and allowed the appeal. It held: (i) Quietus of the completed assessment is the fundamental rule and exception to this rule is Re-opening of assessment by A0 under section 147 or exercise of Revisional jurisdiction by CIT under section 263 of the Act. Therefore, there are safeguards provided; which are sine qua non for assumption of jurisdiction; (ii) reason to suspect; howsoever strong; cannot replace reason to believe; (iii) escapement of income was has to be due to fault of the assessee, in not fully and truly disclosing the material facts at the time of original assessment; this is not satisfied in the present case; (iv) relies on Supreme Court ruling in Kelvinator; to hold mere change of opinion cannot be a ground to reopen assessment; (v) accordingly; quashes the order and allows the appeal.

Argued by Adv. Bharat Raichandani i/b UBR Legal

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)/ADDL/JCIT(A) Madurai, (hereinafter referred to as ‘Ld.CIT(A)‘), dated 11.12.2019 for the Assessment Year (hereinafter referred to as ‘AY‘) 2013-14 u/s. 143(3) read with Section 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act‘).

2. The brief facts of the case are that the assessee is a private limited company carrying on the business of manufacturing and export of leather footwear. The assessee is noted to have filed its return of income for AY 2013-14 on 29.09.2013, declaring total income of ₹3,10,17,480/-. The return was selected for scrutiny, and in response to notices under section 143(2) and 142(1) of the Act, the AO acknowledged that the assessee, participated in the assessment proceedings, and upon his directions, attended, filed relevant documents, furnished books of accounts, balance sheets, income and expenditure statement, and other details as requisitioned by the AO.

3. The AO, after scrutinizing the return and after conducting relevant verifications, passed the original scrutiny assessment order under section 143(3) of the Act on 22.03.2016, assessing the income at ₹3,11,44,960/-in place of total income declared by the assessee at ₹3,10,17,480/-(disallowance of excess depreciation on residential premises of ₹12,74,820/-). Thereafter, the case of the assessee was re-opened after expiry of 4 years by issue of notice under section 148 of the Act on 14.03.2019. The reasons recorded by the AO prior to re-opening of assessment reads as under: –

“The assessee company was incorporated on 02.08.1985. The assessee is engaged in the business of manufacturing & exporting of leather footwear. The return of income for Ay 2013-14 was e-filed on 29.09.2013 declaring total income as Rs. 3,10,17,480/-.

2. In this case, scrutiny assessment was completed on 22.03.2016 assessing total income at Rs. 3,11,44,960/- as against the Return of Income of Rs. 3,10,17,480/-.

2.1. While analyzing the scrutiny record, it is found, the assessee had deducted Rs. 30,16,697/- in P&L A/cas write off of leasehold land premium paid to MIDC. This being write off of capital asset i.e. land purchased which is capital in nature. Further accounting standard AS-19 is not applicable for lease agreement to used land.

It was further noticed that the assessee has shown list of immovable properties owned by the assessee as on 31 march 2013(9 flats and 4 residential buildings) but in computation of income, no house property income has been offered for taxation.

In the light of the facts narrated herein above it is clear that the income of Rs 30,16,697/-& income of house property for A.Y. 2013-14 liable for taxation had escaped assessment.

3. The facts on record as well as the information received have been looked into by me. In the light of all the facts recorded here, I have reasons to believe that in the assessment year under consideration, an income in excess of Rs.1 lac liable for Taxation had escaped assessment owing to failure on part of the assessee to disclose fully and truly all material facts necessary for its assessment. In view of this, the assessment for AY 2012-13 needs to be reopened u/s. 147 of the Income-tax Act, 1961, so that this income can be brought to tax.

Hence, the approval for reopening the assessment for AY. 2014-15 in this case is hereby solicited in accordance with the provisions of Sec. 151 of the Income-tax Act, 1961.

Issued notice u/s. 148 of the Income-tax Act, 1961”

4. The AO thereafter passed the re-assessment order dated 11.12.2019 under section 147/143(3) of the Act by accepting the assessee’s explanation regarding income of house property, but drew adverse view only on one issue i.e. regarding leasehold premium paid to MID to the tune of ₹30, 16, 697 by making an addition of 30,16,697/-.

5. Aggrieved by the order passed by the AO, the Assessee preferred an appeal before the Ld. CIT(A), wherein the assessee is noted to have raised legal issue as well as on merits of addition, which was dismissed by the ld. CIT(A). Aggrieved, the assessee is before us, raising legal issues against re-opening as well as on merits of the addition. Since the assessee has raised legal issues against the reopening of the assessment, the same will be dealt with.

6. Ld. AR submitted that in the present case the original assessment was passed after scrutiny under section 143(3) of the Act, and the proceedings under section 147 of the Act were initiated after the expiry of four years from the end of the relevant assessment year. Ld. AR therefore contended that for valid initiation of proceedings under section 147 of the Act, it was necessary for the AO to show that while recording the reasons for re-opening, he was prima facie satisfied that the statement of income chargeable to tax for the relevant assessment year was as a result of the failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment. He submitted that from the recorded reasons itself such satisfaction could not be discernible.

7. Drawing our attention to the reasons recorded (supra), the Ld. AR submitted that nowhere it was even prima facie apparent that in AO’s opinion, escapement of income has resulted because of assessee’s failure to disclose truly and fully all material facts for his assessment. Ld. AR therefore submitted that the twin conditions embedded in section 147 of the Act and proviso to it were not fulfilled. According to Ld. AR, initiation of reassessment would have been permissible only if the AO was having in his possession fresh and tangible material which came in his possession subsequent to passing of order under Section 143(3), and its relation with the formation of belief should have been spelled out in the reasons recorded to justify the reopening.

8. According to the Ld. AR, the AO miserably failed to demonstrate the foregoing in the recorded reasons, which vitiated the assumption of re-opening jurisdiction. The Ld. AR further submitted that in the course of original assessment proceedings under section 143(3), the assessee was directed to furnish various details arising from the ITR filed by the assessee, which includes the financial statements, including profit and loss account, balance sheets, additional disclosure, etc., and the AO had asked a specific question by issuance of notice under section 143(2) of the Act and several notices under section 142(1) of the Act.

9. Drawing our attention to the reply of the assessee dated 08.03.2016 to the AO, regarding leasehold land premium written off at ₹30,16,697/-. It would be gainful to reproduce the relevant reply of the assessee to the Assessing Officer as under:-

To,
The Asstt. Commissioner of Income Tax-11(1)(1),
Mumbai

Sub: Assessment Proceedings
Ref: P.A. NO. AAACR1955L
Assessment Year 2013-14

Sir,

In connection with assessment proceedings, in respect of assessment year 2013-14, we have to submit as under:

1. Explanation of Leasehold Land Premium written off Rs. 30,16,697/-

We purchased the Factory Premises situated at Plot No. A-463, TTC Industrial Area, MIDC, Mahape, Navi Mumbai 400 710 from M/s. Mantra Exports Pvt Ltd for the total value of Rs. 15 Crore vide Deed of Assignment dated 27.03.2009 (copy enclosed).

The said total value of Rs. 15 Crore includes the lease money paid by M/s. Mantra Exports Pvt Ltd to MIDC amounting to Rs. 2,58,20,800/-.

The said premises are constructed by M/s. Mantra Exports Pvt Ltd on leasehold land of MIDC for the lease period of 95 years.

The said factory premises are used by M/s. Mantra Exports Pvt Ltd for the period Oct’06 to Mar’09 i.e. 2¹/₂ years.

The remaining period of lease i.e. 92/2 years is transferred in our name vide Lease Agreement dated 12.06.2009 made and entered between MIDC, M/s. Mantra Exports Pvt Ltd & M/s. Ram Fashion Exports Pvt Ltd at the lease premium of Rs. 35,52,350/- as determined by MIDC.

We have taken the total lease money of Rs. 2,93,73,150/- as Capital Assets and written-off @ 1/30 i.e. Rs. 9,79,105/- of total lease money.

Though the lease money is paid on Capital Assets, its value cannot remain same all the time during the lease period.

The lease period in the hand of original transferor was for 95 years. However the lease period in our hands is 92/2 years.

Slowly and gradually the lease period is reduced on the basis of use and accordingly the value of Capital Assets reduces.

The written-off amount is taken at 1/30th of value of said Capital Assets as the life of Factory Premises/Building is normally 30 to 35 years. Said Factory Premises is constructed in the year 2006, hence the amount written-off is 1/30th of the total value, which is Rs. 9,79,105/-.

Similarly, we purchased the Factory Premises situated at Plot No. A-460-461, TTC Industrial Area, MIDC, Mahape, Navi Mumbai 400 710 from M/s. Pharma Base India Pvt Ltd for the total value of Rs. 9.00 Crore vide Deed of Assignment dated 29.09.2011 (copy enclosed). Said total value includes Leasehold Land Value Rs. 5.60 crore. With respect to transfer of said leasehold land we paid Rs. 51,27,765/- towards Lease Premium to MIDC, Transfer Charges, Registration Charges, etc. Amount written-off is 1/30th of the total value of Rs. 6,11,27,765/-, which is Rs. 20,37,592/-.

Summary of amortization claimed on Leasehold Land is as follows:

2. Ledger copies of Major Expenses

Enclosed herewith ledger copies of Major Expenses with sample bills.

Thanking you.

Yours sincerely,
For Ram Fashion Exports Pvt Ltd

Director”

10. Thus, according to the Ld. AR, it can be seen that the AO, after asking about the issue in question i.e. deduction in respect of write off lease hold land premium paid to MIDC of ₹30,16,697/- in its P&L account, has enquired about it during original assessment proceedings and while passing the assessment order on 22.03.2016 has not taken any adverse view against the assessee in the assessment order passed on 22.03.2016. Thus, according to the ld. AR, the impugned action of the AO to re-open the assessment tantamounts to “change of opinion”, which is impermissible, since it is the trite law that the Assessing Officer does not enjoy the power of review. Hence, the action of the AO to reopen the assessment is vitiated and bad in law and, therefore, has to be struck down.

11. For such a proposition, he relies upon several case laws, including the decision of the Hon’ble Supreme Court, wherein the Hon’ble Court endorsed the view of the Full Bench decision of the Hon’ble Delhi High Court in the case of CIT vs. Kelvinator of India Ltd.(320 ITR 561), wherein, inter alia, it was held that the assessing officer has no power to review and emphasized that AO, in absence of “tangible material”, should not resort to re-opening. The Hon’ble Supreme Court held that merely on “change of opinion”, the AO should not reopen the assessment because he does not enjoy the power to review his own order. In this case, the AO in the reasons recorded has not stated about receiving any tangible material from any other source, but has relied only on the assessment records of the assessee to reopen the assessment which is not permissible.

12. Hence, in the light of the averments made, the Ld. A.R. summed up that, besides there being no fresh tangible material available with the A.O., as evident from the reasons recorded, the impugned re-opening of assessment was bad in law and, therefore, proceedings under section 147 suffered from an incurable infirmity and, therefore, proceedings under section 147 and hence, re-opening of the assessment was legally impermissible; and moreover, since the issue regarding leasehold rights, as returned, had already been inquired into by the A.O. during the original assessment proceedings under section 143(3), the impugned action of the A.O. to re-open tantamounts to a change of opinion, and there was no failure on the part of the assessee in not disclosing fully and truly all material facts necessary for the assessment. Hence, he urged us to allow the legal issue against re-opening of the assessment.

13. Per contra, the Ld. D.R. supported the action of the A.O. in re-opening the assessment. According to the Ld. D.R., the assessee failed to disclose fully and truly all material facts necessary for the assessment, and hence, the A.O. rightly re-opened the assessment and, therefore, does not want us to interfere with the action of the A.O. in re-opening the assessment.

14. Heard both parties on the legal issue challenging the action of the AO to have reopen the assessment for AY 2013 14 which was originally framed u/s.143(3) of the Act after four (4) years from the end of the assessment year. Before we advert to deal with the legal issue, let us understand the settled position of law on the issue at hand. To begin with, it should be kept in mind that the concept of assessment is governed by the time barring Rule; and the assessee acquires a right as to the finality of proceedings. Quietus of the completed assessment is the Fundamental Rule and exception to this rule is Re-opening of assessment by A0 under section 147 or exercise of Revisional jurisdiction by CIT under section 263 of the Act. Therefore, the Parliament in its wisdom has provided safeguards for exercise of the reopening of assessment jurisdiction to AO; and revisional jurisdiction of CIT, which condition precedents are sine qua non for assumption/usurpation of jurisdiction. In the case of reopening of assessment, section 147 provides that where the Assessing Officer has reason to believe escapement of income [is the jurisdictional fact & law] he shall record his reasons for doing so and thereafter, reopen the assessment and then assess or reassess the income which has escaped assessment; and likewise for exercising revisional jurisdiction u/s. 263, the CIT has to find the assessment order of the AO to be erroneous as well as prejudicial to the revenue. Unless the condition precedents are satisfied, the AO or the CIT can’t exercise their reopening jurisdiction or revisional jurisdiction of an assessment respectively. The legislative history is that in respect to the reopening us. 147 of the Act, the Parliament by Direct Tax Laws (Amendment) Act 1987 w.e.f. 01.04.1989 had substituted “for reason to believe escapement of income” to for reasons to be recorded by him in writing, is of the opinion” which gave unbridled subjective satisfaction to the AO was later substituted back to’reason to believe escapement of income”, by the Direct Tax Laws (Amendment) Act, 1989. The Hon’ble Apex Court as well as the Hon’ble jurisdictional High Court as well as other Hon’ble High Courts have already held in plethora of cases the test of a prudent person instructed in law in understanding jurisdictional fact & law (mixed question of fact and law) the reason to believe escapement of income (supra).

15. As noted, the AO, who is a quasi-judicial authority is empowered to reopen the assessment only in a given case wherein there is reason to believe escapement of chargeable income to tax, which he has to record before issuing notice u/s 148 of the Act. In this regard, it must be borne in mind that reasons to believe postulates foundation based on information, and belief based on reason. After a foundation based on information, is made, there still must be some reason, which should warrant the holding of a belief that income chargeable to tax has escaped assessment. It has to be kept in mind that the Hon’ble Supreme Court in Ganga Saran & Sons P. Ltd. Vs. ITO (1981) 130 ITR 1 (SC) held that the expression “reason to believe” occurring in sec. 147 “is stronger” than the expression “if satisfied” and such requirement has to be met by the AO in the reasons recorded before usurping the jurisdiction u/s. 147 of the Act. At this stage, authorities must understand the fine distinction between “reason to suspect” & ‘reason to believe”. Adverse information against an assessee may trigger “reason to suspect,” then the AO is duty bound to make reasonable enquiry to collect material which would make him form a belief that there is an escapement of income. And on satisfaction of such an event, then proceed to reopen the assessment and not before that event, because reason to believe is the jurisdiction requirement u/s 147 of the Act, and not the reason to suspect escapement of income. This subtle distinction should be borne in mind while adjudicating the legal issue raised by assessee.

16. And further, the reason to believe escapement of income should be that of AO, and not that of any other authority, because then it will be against one of the basic feature of the Constitution of India ie, the Rule of Law, wherein the Parliament has empowered this reopening jurisdiction only to that of Assessing Officer and that is why if the reason to believe escapement of income is not that of AO, the assumption of jurisdiction to re-open, is vitiated; and resultantly bad in law, because assumption of jurisdiction to reopen will be on the basis of borrowed satisfaction.

17. And, if the AO intends to re-open the assessment [scrutinized u/s 143(3)] after four years from the relevant assessment year, then as per first proviso to section 147 of the Act, an additional safeguard or condition that escapement of income was due to fault of the assessee, in not fully and truly disclosing the material facts at the time of original assessment needs to be satisfied. In this context, it is gainful to refer to the Hon’ble Supreme Court decision endorsing the Full Bench decision of the Hon’ble Delhi High Court in CIT vs. Kelvinator of India Ltd. [320 ITR 561] wherein inter-alia, it was held that Assessing Officer has no power to review; and emphasized that AO in absence of “tangible material” should not resort to reopening. The Hon’ble Supreme Court held that merely on “change of opinion” the AO should not re-open the assessment because he doesn’t enjoy the power to review his own order.

18. Thus, as noted before the AO assumes jurisdiction to re-open it is necessary that the conditions laid down in the said section 147 has to be satisfied viz., AO should record “reason to believe” that the income chargeable to tax for that assessment year has escaped assessment. And, if the AO intends to re-open an assessment [scrutinized u/s 143(3)] after four years from the relevant assessment year, then an additional condition needs to be satisfied viz escapement of income was due to fault of the assessee, in not fully and truly disclosing all the material facts necessary at the time of original assessment. If the conditions stipulated by statute are not satisfied at the first place, then it cannot be said that AO has validly assumed jurisdiction u/s.147 of the Act. Therefore, the question for consideration is whether on the basis of the reasons recorded by the AO, he could have validly reopened the assessment. For that it has to be seen as to whether the AO on the basis of whatever material before him, [which he had indicated in his “reasons recorded”] had reasons warrant holding a belief that income chargeable to tax has escaped assessment. At this stage, it is also important to bear in mind that the reasons recorded by AO to reopen has to be evaluated on a stand-alone basis and no addition/extrapolation can be made or assumed, while adjudicating the legal issue of AO’s usurpation of jurisdiction u/s. 147 of the Act. The Hon’ble Bombay High Court, in the case of Hindustan Lever Ltd. vs. R.B. Wadkar [(2004) 268 ITR 332], has, inter alia, observed that “……….  It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons. “Their Lordships added that “The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence….”. Therefore, the reasons are to be examined only as they were recorded by the AO before the issue of the notice.

19. From the aforesaid understanding of law governing the issue at hand, we have to examine the reasons recorded by AO to reopen which has been already set out above, and test whether the condition precedent necessary to usurp the re-opening jurisdiction as required u/s. 147 of the Act is satisfied or not ? And in the present case, since four years have elapsed from the end of the relevant AY and original assessment has been completed u/s. 143(3) of the Act, it needs to be examined as to whether the addition condition precedent as laid down in first proviso to section 147 of the Act is also satisfied or not? For doing that we have to examine on a standalone basis the reasons recorded by the AO to reopen the assessment reproduced at Para.3 supra. In the first para, the A.O., in the recorded reasons, is noted to have stated that the assessee is in the business of manufacturing and exporting of leather footwear and has filed return of income declaring total income of ₹3,10,17,480/-. In the second para, he notes that scrutiny assessment was completed on 22.03.2016 assessing total income of ₹3,11,44,960/-. In para 2.1, he observes that while analyzing the scrutiny record (not from any other source/tangible material from outside), he found that the assessee has deducted ₹30,16,697/- in the P&L account, which being write off of leasehold land premium paid to MIDC, which being write off of capital asset, i.e., land purchased, which is capital in nature, accounting standard (AS-19) is not applicable for lease agreement to used land. [In the next para, he notes about omission on the part of the assessee showing income from house property, which is not relevant for considering the legal issue because the A.O. has accepted the assessee’s explanation and no adverse view has been taken while framing the assessment order on 11.02.2019; hence, we can ignore it]. In the light of the facts stated regarding the deduction claimed of ₹30,16,697/-, according to AO, there is escapement of income of ₹30,16,697/-.

20. In para 3, he has made a statement that, owing to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, he is reopening the assessment for A.Y.; hence, he was of the view that assessment for A.Y. 2012–2013 needs to be reopened under section 147 of the Act so that income can be brought to tax. Further, in para 4, he has admitted to have received approval for reopening the assessment for A.Y. 2014–15 in this case under section 150 of the Act.

21. Hence, it is noted that, in the light of the aforesaid reasons recorded, the A.O. has made an allegation that the assessee did not disclose fully and truly all material facts necessary for the assessment, without spelling out what facts in issue has not been disclosed by the assessee during the original assessment, instead it has been brought to our notice that pursuant to a query from the AO during original assessment assessee has explained about its claim of write-off, which reply we have reproduced above at para 9 (supra). The AO, during the original assessment, is noted to have asked the assessee regarding the claim of write-off of ₹30,16,697 in respect of leasehold land premium, and the assessee, vide letter dated 08.03.2016, has given explanation regarding the same. Thus, the bald allegation of AO in his reason recorded that assessee failed to disclose fully and truly all the material facts necessary for the assessment, is found to be factually wrong, misplaced and erroneous. Hence, we find that the assessee had disclosed the fact in issue and consequently AO failed to satisfy the requirement of law as prescribed under the first proviso to section 147 of the Act. Moreover, the A.O. himself agrees at para 2 of the ‘reasons recorded’ itself that “while analyzing the scrutiny record, it is found that the assessee had deducted ₹30,16,697/- in the profit and loss account as right of leasehold land premium paid to MIDC”, which admission itself shows that the assessee has disclosed fully and truly all material facts necessary for the assessment. Hence, it is noted that the essential condition precedent for reopening the assessment after four years from the end of the relevant assessment year is not satisfied; rather, it is prohibited. Hence, the assessee succeeds on this legal issue.

22. Further, we find that there is non-application of mind by the A.O. while recording the reasons before reopening the assessment because he starts the reasons recorded by stating that it is regarding A.Y. 2013–14; however, at para 3, he states that he is reopening the assessment for A.Y. 2012–13 under section 147 of the Act and thereafter has received approval for reopening of the assessment for A.Y. 2014–15, whereas the relevant assessment year before us is A.Y. 2013–14. Hence, on the reasons stated above, we find that the AO’s impugned action to reopen the assessment after four years from the end of the relevant assessment year, is not satisfying the requirement of law. Further, in the absence of fresh tangible material, the A.O. could not have resorted to reopening, as held by the Hon’ble Supreme Court in CIT vs. Kelvinator of India (supra). Therefore, looking from the aforesaid angles also, we hold that the reopening of the assessment was bad in law.

23. For the reasons discussed in the foregoing, therefore, we find that the essential condition precedents to invoke the jurisdiction to reopen the assessment for AY 2013-14 is absent; and consequently the action of AO to reopen the assessment without complying with the requirement of law is held to be wholly without jurisdiction and therefore the issuance of notice u/s. 148 of the Act is ab-initio void and consequent actions of AO are quashed.

24. In the result, the appeal of the assessee is allowed.

Order pronounced on the 27^th day of May-2026, in Chennai.