Case Law Details
PCIT Vs Farmson Pharmaceuticals Gujarat Pvt Ltd (Gujarat High Court)
In a significant ruling, the Gujarat High Court addressed the scope of reassessment under Section 147 of the Income Tax Act, 1961, in the case of PCIT Vs Farmson Pharmaceuticals Gujarat Pvt Ltd. The court’s decision stems from an appeal filed by the Income Tax Department challenging the validity of reassessment proceedings initiated after a scrutiny assessment.
The case revolves around the reopening of assessment for the Assessment Year 2008-09, where the Assessing Officer (AO) sought to disallow additional depreciation claimed by the assessee on spare parts of machinery. The AO’s basis for reassessment was the profit and loss account, which was available during the original assessment as well. The key contention was whether this constituted sufficient “tangible material” to justify reassessment under Section 147.
The Gujarat High Court deliberated on whether the AO’s actions constituted a valid reassessment or amounted to a mere change of opinion. Citing precedents including the Supreme Court’s stance in CIT Vs. Kelvinator of India Ltd., the court emphasized that reassessment cannot be solely based on a reevaluation of existing facts without new, substantive material indicating income escapement.
The court highlighted that the original assessment had already scrutinized the same financial data, and the subsequent reassessment lacked any fresh evidence or failure by the assessee to disclose material facts. Consequently, the court upheld the lower authorities’ decisions invalidating the reassessment.
In conclusion, the Gujarat High Court’s decision in PCIT Vs Farmson Pharmaceuticals Gujarat Pvt Ltd underscores the stringent requirements for initiating reassessment under the Income Tax Act. It reinforces the principle that AO’s powers are limited to instances where there is tangible new evidence of income escapement, rather than a reevaluation based on previously available information.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
This appeal is filed under Section 260A of the Income Tax Act, 1961 (for short “the Act”) by the Appellant-Revenue proposing the following substantial questions of law arising out from the order dated 20.10.2023 passed by the Income Tax Appellate Tribunal (for short “the Tribunal”), Ahmedabad in ITA No.1229/Ahd/2017 for the Assessment Year 2008-09.
“A. Whether on the facts and circumstances of the case and in law, the Ld. Appellate Tribunal was justified in holding that reopening of assessment under section 147 is only change of opinion and hence bad in law, without appreciating that the issue-in-hand was neither examined by the assessing officer during original assessment proceedings nor the assessing officer had formed any opinion on the issue?”
B. “Whether on facts and circumstances of the case and in law the Ld. Appellate Tribunal was justified in holding reopening u/s 147 of the Act as invalid without appreciating the observations of the Apex Court in the case of TechSpan India (P.) Ltd. [2018] 92 taxmann.com 361 (SC), wherein it has been held that before interfering with proposed re-opening of assessment on ground that same is based only on a change of opinion, Court ought to verify whether assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is basis of alleged escapement of income that was taxable; if assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to Assessing Officer any opinion on questions that are raised in proposed re-assessment proceedings?”
2. The Assessing Officer reopened the assessment by recording the following reasons under Section 147 of the Act.
“(a) In this case, the assessee has filed the return of income for A.Υ. 2008-09 on 26.09.2008 declaring loss of Rs.67,90,429/-. The case was selected for scrutiny assessment and the income was assessed at a loss of Rs.61,61,237/u/s 143(3) of the I.T. Act. The income was assessed at Rs.1,80,342/ u/s 115JB.
(b) It is observed from records of the assessee that the assessee has claimed additional depreciation on the Spare Parts @ 20% and @ 10% in respect of Rs.34,32,284/- upto September 2007 and of Rs.8,76,119/- after September 2007 (totalling to Rs.43,08,403/-) for machines which were already installed. As these are Spare Parts of a machine and cannot be themselves classified as a machine, additional depreciation could not be allowed. Thus, the additional depreciation on machinery spares of Plant & Machinery which was already acquired and installed earlier cannot be allowed.
(c) In view of the above facts, I have reason to believe that in this case income chargeable to tax in respect of Rs.7,74,069/- has escaped assessment for the AY 2008-09 within the meaning of clause (c) of Explanation 2 of section 147 of the Act”
3. The Assessing Officer in the reassessment order made an addition disallowing Rs.7,74,069/- towards the depreciation and reduced returned loss.
4. The CIT (Appeals) allowed the Appeal filed by the Assessee holding that the reasons recorded for reopening the assessment by the Assessing Officer are based upon the information from the profit and loss account unavailable on record and accordingly, the reassessment proceedings are not tenable. The CIT(Appeals) has observed as under:-
“5. I have considered the facts of the case, the submission of the appellant and the AO’s observations. In this case, the original return of income had been selected for scrutiny assessment u/s.143(3) of the Act. Subsequently, the assessment has been reopened after a period of more than four years from the end of the assessment year. Under such circumstances, the onus was on the AO to demonstrate in his reasons recorded for reopening of the assessment that the income had escaped assessment on account of failure on the part of the appellant to disclose fully and truly all material facts for the purpose of making assessment. In this regard, it is seen that the materials on the basis of which the AO had reopened the assessment were already on record. This fact has also been mentioned in Para 3.3 of the assessment order in which the AO has clearly mentioned that action u/s.147 was initiated on the basis of materials available on record and the AO subsequently came to know that claim of additional depreciation on Spare Parts of Rs.7,74,069/- are not allowable to the assessee. Thus, there being no failure on the part of the appellant to fully and truly disclose all material fact, the reopening of the assessment beyond four years from the end of assessment year cannot be held to be valid on the basis of the judicial pronouncement relied upon by the appellant in its submission as reproduced above. Hence, the reopening of the assessment is held to be bad in law. Since the reopening of the assessment has itself been held bad in law, hence the merit of the addition made in the reassessment order is not required to be adjudicated. Hence this ground of appeal is not adjudicated. Hence, this ground of appeal is not adjudicated.
5. The Tribunal on an appeal filed by the Appellant-Revenue following the decision of the Kelvinator in the case of CIT Vs. Kelvinator of India Ltd. of the Hon’ble Supreme Court upheld the order passed by the CIT (Appeals) and observed as under:-
“7.2. From the reasons recorded by the A.O., it clearly reflects that the same are based on the profit and loss account and balance sheet field by the assessee, which were very much available before the Assessing Officer at the time of passing original assessment order also. Further the reasons recorded by the Assessing Officer does not sh that any new tangible material available on record and there is failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment. In the light of these facts, we examined the applicability of the Hon’ble Apex Court judgment rendered in the case of CIT Vs. Kelvinator of India Ltd. wherein categorically held that the Assessing Officer has no power to review his assessment order, but has only the power to reassess, provided there is “tangible material” on record that there is escapement of income from assessment. The relevant portion of the Supreme Court judgment in Kelvinator case reads as follows:
“…4. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from 1- 4-1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post 01.04.1989, power to reopen is much wider. 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 re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre- condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of “change of opinion” as an inbuilt test to check abuse of power by the Assessing Officer. Hence, after 01.04.1989, 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 with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987. Parliament not only deleted the words “reason to believe but also inserted the word “opinion” in section 147 of the Act. However, on receipt of representations from the Companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer.”
7.3. Further the Full Bench judgment of the Delhi High Court in the case of CIT Vs. Kelvinator of India Ltd. (123 Taxmann.com 433) clearly held that the Assessing Officer does not have any jurisdiction to review his own order, his jurisdiction is confined only to rectification of mistake as contained in section 154 of the Act, that too “mistake apparent on record” and not on debatable issues. Thus the only remedy left with the department is to invoke Revision proceedings u/s. 263 of the Act, to revise the assessment order by the Commissioner of Income Tax on the ground that the assessment order is erroneous and prejudicial to the interest of Revenue. Further wherever a regular assessment order is passed by Assessing Officer, it is presumed that the order was passed after application of mind, thereby Assessing Officers are not given powers to reopen the assessment on the same set of facts in the absence of tangible material.
8. The Jurisdictional High Court of Gujarat in the case of Sandesh Ltd. (cited supra) distinguished the judgment of PVS Beedies Pvt. Ltd. that reopening cannot be resorted to under the insistence of the audit party, particularly when the Assessing Officer holds a contrary belief. The relevant portion of the judgment reads as under:
“…. 5. The record suggests that previously assessment was framed by the Assessing Officer after full scrutiny. The impugned notice has been issued beyond the period of four years. The question of the assessee failing to disclose truly and fully all material facts necessary for assessment therefore becomes important. Nothing stated in the reasons recorded or from the materials on record suggest that the assessee failed to disclose truly and fully all material facts. In fact, the Assessing Officer has examined the materials on record during the original assessment proceedings, How to form a belief that assessee’s treatment of capital gain tax was erroneous. Being a notice which was issued beyond a period of four years, this aspect therefore becomes important. As correctly pointed out by the counsel for the petitioner, there was no additional or extraneous material at the command of the Assessing Officer now to believe that income chargeable to tax has escaped assessment. Only on this ground, the notice of reopening needs to be quashed.
6. Additionally, we also find that the Assessing Officer was acting at the behest of the audit party. The petitioner has taken a specific stand that the impugned notice has been issued under an audit objection at the instance of the audit party. The law on the subject is sufficiently clear. As observed by Supreme Court in case of CIT v. P.VS. Beedies (P) Ltd. (1999) 103 Taxman 294/237 ITR 13, even if an issue has been brought to the notice of the Assessing Officer by the audit party, reopening may be permissible if it can be gathered that having applied his mind to such an issue, the A.O. formed an independent belief that income chargeable to tax has escaped assessment. However, as held by this Court in case of Adani Exports v. Dy CIT [1999] 240 ITR 224 and several times repeated by the Supreme Court later, reopening cannot be resorted to under the insistence of the audit party, particularly when the Assessing Officer holds a contrary belief. From this angle, we have perused the original files and do not find that the Assessing Officer independently believed that the audit note or the audit objection was otherwise valid.
7. Such being the position, on these two grounds, impugned notice is set aside. Petition is allowed and disposed of.”
9. Respectfully following the above judicial precedents, we have no hesitation in holding that when there is no failure on the part of the assessee in disclosing the income and No new tangible material on record, the reopening of assessment after 4 years period amounts to “change of opinion” only. Therefore the reopening of assessment invalid in law. Thus the finding arrived by the Ld. CITIA) does not require any interference. Therefore the grounds raised by the Revenue is devoid of merits and the same is hereby dismissed. 10. In the result, the appeal filed by the Revenue is hereby dismissed.”
6. In the facts of the case reveals that the assessing officer reopened the assessment only on the basis of the details derived from the profit and loss account which is filed by the assessee and in absence of any tangible materials available on record and in absence of any failure on the part of assessee to disclose fully and truly all the material facts necessary for the purpose of assessment, the Tribunal has rightly relied upon the decision of Kelvinator of India (Supra).
In view of the above and settle legal position, we are of the opinion that no question of law much less arisen from the impugned order passed by the Tribunal. The appeal is therefore devoid of any merits and stands dismissed.
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