Reassessment Notice Under Section 148 Invalid If Issued After Four Years

NTPC Ltd. Vs DCIT (ITAT Delhi)

Reassessment notice issued under Section 148 is invalid, if it is issued after the four-year of relevant assessment year

The assessee, NTPC Ltd, had filed its original return of income for the assessment year 2006-07 on November 14, 2006. The return was processed under Section 143(1) of the Income-tax Act, 1961. Subsequently, the assessee filed a revised return on March 20, 2007. The assessment was completed under Section 143(3) on November 26, 2007.

During the audit, certain discrepancies were noticed by the Revenue Audit Party, which were communicated to the assessee on September 8, 2008. The assessee replied to the audit objections on September 11, 2008. However, the Revenue did not respond to the assessee’s reply.

Reassessment Notice

On March 18, 2013, the Assessing Officer (AO) recorded reasons for reopening the assessment, citing that the assessee had claimed deductions on account of book adjustment in respect of exchange rate variation and stores written off, which were allegedly capital in nature. The AO issued a notice under Section 148 of the Income-tax Act, 1961, on March 18, 2013.

Grounds of Appeal

The assessee appealed to the ITAT, raising several grounds, including:

1. The reassessment notice was invalid as it was issued beyond the four-year period from the end of the relevant assessment year.

2. The AO had erred in recording reasons for reopening the assessment, as the assessee had disclosed all material facts necessary for assessment.

3. The AO had failed to appreciate that the assessee had claimed deductions on account of book adjustment and stores written off, which were revenue in nature.

ITAT’s Decision

The ITAT, after examining the facts and circumstances of the case, held that the reassessment notice issued under Section 148 was invalid, as it was issued beyond the four-year period from the end of the relevant assessment year. The ITAT observed that the assessee had disclosed all material facts necessary for assessment, and there was no failure on the part of the assessee to disclose fully and truly all material facts.

The ITAT also noted that the AO had not responded to the assessee’s reply to the audit objections, and the reassessment notice was issued after a lapse of five years from the completion of the assessment. The ITAT, therefore, allowed the appeal and set aside the reassessment notice.

Implications

This judgment highlights the importance of adhering to the statutory time limits for issuing reassessment notices under Section 147 of the Income-tax Act, 1961. It also emphasizes the need for the AO to respond to the assessee’s replies to audit objections and to appreciate the nature of deductions claimed by the assessee.

In conclusion, the ITAT’s decision in this case serves as a reminder to the Revenue authorities to ensure that reassessment notices are issued within the statutory time limits and that the AO’s powers are exercised in accordance with the provisions of the Income-tax Act, 1961.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the assessee against the order of ld. CIT(A)-34, New Delhi dated 18.02.2019.

2. Following grounds have been raised by the assessee:

“1. On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad both in the eye of law and on facts.

2. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO despite the fact that the reopening by the AO and consequent reassessment without complying with the statutory conditions prescribed under Section 147 read with Section 148 of the Act is bad in law.

3. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of the AO ignoring the fact that the AO has erred both on facts and in law in making reassessment under Section 147 of the Act as the reasons recorded for reopening the assessment does not meet the requirements of Section 147 of the Act.

4. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in rejecting the contention of the assessee that the reassessment proceedings initiated under section 148 are bad in law as there is no live nexus between the reasons recorded and the belief formed by the AO

5. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in confirming the order passed by the learned AO under section 148 of the Income tax Act is barred by limitation since the same is passed beyond the specified time limit

6. On the facts and circumstances of the case, the notice issued under section 148 is illegal having been issued on the basis of reasons containing no whisper as to how the assessee has failed to disclose fully and truly all material facts, the notice having been issued after four years from the end of the relevant assessment year.

7. (i) On the facts and circumstances of the case, the reassessment proceedings initiated by the AO and upheld by the learned CIT(A) are bad in the eyes of law, as the reasons recorded for the issue of notice under section 148 are based merely on account of change of opinion.

(ii) On the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in upholding the reassessment proceedings, despite the fact that there has been no omission on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment.

8. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law in rejecting the contention of the assessee that the reassessment proceedings initiated beyond a period of four years from the end of the relevant assessment year despite the fact that original assessment being framed under section 143(3) is bad in law in view of proviso to section 147 of the Act.

9. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law in confirming the action of the learned AO under section 148 of the Income tax Act is illegal, that the same has been passed without assumption of valid jurisdiction.

10. (i) On the facts and circumstances of the case the learned CIT(A) has erred both on facts and in law in confirming the addition of Rs. 234,54,25,745/- made by AO on account of exchange rate variation.

(ii) That the said addition has been confirmed arbitrarily rejecting the explanation and evidences brought on records by the assessee.

11. (i) On the facts and circumstances of the case the learned CIT(A) has erred both on facts and in law in confirming the disallowance of Rs. 80,00,000/- made by AO on account of stores written off and loss on maturity of current investments.

(ii) That the said addition has been confirmed arbitrarily rejecting the explanation and evidences brought on records by the assessee.

12. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in upholding the action of the learned AO without application of his own mind.

13. On the facts and circumstances of the case, the learned CIT(A) has grossly erred both on facts and in law in confirming the above addition by indulging in surmises and conjecture and, only on the basis of presumption and assumption.

14. On the facts and circumstances of the case, the learned CIT(A) has grossly erred both on facts and in law in confirming the action of the learned AO that the order has been passed without affording adequate opportunity of being heard to the assessee in violation of principles of natural justice.”

3. At the outset, the only question required to be adjudicated is that,

“Whether the notice issued by the revenue authorities after the expiry of four years from the end of the relevant assessment year is valid and was any there escapement of income chargeable to tax by reason of the failure on the part of the assessee or not?”

4. The pertinent facts required for the adjudication of the case are as under:

♦ Assessment Year : 2006-07

♦ Date of filing of original return : 14.11.2006

♦ Date of filing of revised return : 20.03.2007

♦ Date of passing of order u/s 143(3) : 26.11.2007

♦ Date of intimation of audit objections to the assessee :

08.09.2008

♦ Date of reply of the assessee on the audit objection :

11.09.2008

♦ Date of issue of notice u/s 148 : 18.03.2013

5. The audit objection raised by the Revenue audit party is as under:

“Sub: Reply to objection raised by Revenue Audit party – reg.

On perusal of your assessment record, the Revenue Audit party has noticed certain discrepancies in the asstt. year(s) mentioned in the table given below, the reply of which may please be furnished before the undersigned in Room No. 406, C.R. Building, New Delhi on or before 15-09-2008.

Please note that in case of non-furnishing of the above reply, it shall be presumed that the above mentioned discrepancies noticed by the Revenue Audit party are correct and necessary remedial as per the provisions of Income tax Act shall be initiated on the basis of available record.”

Sd/-

(R. K. Sharma)

Asstt. Commissioner of Income Tax

Circle-13(1), New Delhi

6. Thus, it can be seen that the objections raised by the Revenue Audit of the CAG raised three issues on verification of the assessment records depreciation, stores written off & bond issue expenses which were claimed as revenue in nature.

7. The objections were conveyed to the assessee and the assessee replied vide letter dated 11.09.2008 with regard to book adjustment of the assets, reasons for claiming, written off stores and bond issue expenses. The assessee submitted that the stores have been written off every year of the obsolete items after the approval of competent authority consisting of teams of quality assurance officers, material management employees and finance division. The assessee has submitted that the bond issue expenses have been infact considered as capital expenditure whereas the audit party has wrongly presumed that the assessee has claimed it as revenue expenditure. With regard to the depreciation, the assessee has submitted that the book adjustment in the depreciation was based on the adjustment of exchange rate difference.

8. After receipt of the reply from the assessee on 11.09.2008, the revenue has not responded either in affirmative or in negative. On 26.11.2013, the Assessing Officer has recorded the reasons for reopening of the escaped income.

9. The reasons recorded by the Assessing Officer are as under:

“Reasons for belief that income has escaped assessment:

M/s NTPC Ltd. filed at an income of Rs. 46,64,46,84,220/- assessed u/s 143(3) of the IT Act in November, 2008.

1. From perusal of records of the assessee for AY 2006-07, it was found that the assessee had claimed Rs.2,34,54,25,754/- аs deduction on account of book adjustment in respect of ERV depreciation under the head prior period adjustment in computation of income. As amount represented book adjustment in r/o of ERV not Backed by the actual remittance, the claim should have been disallowed. Hence, underassessment of income of Rs. 2,34,54,25,754/-.

2. The assessee had claimed a deduction of Rs. 80,00,000/- on account of stores written off and loss on maturity of current investment. These expenses were capital in nature and required to be disallowed. Hence under assessment of income of Rs. 80,00,000/-.

On the basis of examination of the facts and circumstances for AY 2006­07, as above, I have reason to believe that the income has escaped assessment on account of failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment within the meaning of provisions of section 147 of the IT Act, 1961.

Since, four years have expired from the end of the relevant assessment year and the assessment was made u/s 143(3) of the IT Act, as per provisions of section 151(1) of the IT Act, necessary approval of the Commissioner of Income Tax, Delhi-V Now Delhi is solicited for issue of notice u/s 148 of the IT Act, for A.Y. 2006-07.”

Sd/-

Dy. Commissioner of income Tax

10. From the above, it can be observed that out of the three issues raised by the Revenue Audit Party viz. depreciation, stores written off & bond issue expenses which were claimed as revenue in nature, the Assessing Officer has recorded reasons on the issue of depreciation and stores written off. After recording the reasons, the Assessing Officer has issued notice u/s 148 on 18.03.2013. The same reasons have been provided to the assessee on 26.11.2013 in response to the request of the assessee.

11. With regard to issue of notice, the provisions of Section 147 of the Income Tax Act, 1961 are examined which are reproduced as under:

“Income escaping assessment.

147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or re-compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:

Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year:”

12. From the perusal of the record, we observe that the issue of depreciation and written off of stores are already part of the record before the Assessing Officer while completing the assessment u/s 143(3). The depreciation claimed is available clearly in the depreciation schedule and the writing off of stores is decipherable from the P&L account. Thus, we find that there was no failure on the part of the assessee to disclose fully and truly all the material facts required for assessment for the year. The audit party has raised objections only after going through the assessment record before them. There was no new information available to the revenue nor there was any default on the assessee to disclose all the required material facts.

13. Hence, we hereby hold that the notice issued u/s 148 on 18.03.2013 after the expiry of four years from the end of the relevant assessment year, a period of 4 years for the Assessment Year 2006-07 after completion of the assessment u/s 143(3) on 26.11.2007 is invalid and hence the entire assessment is liable to be quashed.

14. We observe that the notice would have been valid, had it been issued before 31.03.2011 as the proviso to Section 147 are not attracted if the notice is issued before expiry of 4 years. The revenue gladly waited for a period of 5 years for the reasons best known to them to issue notice in the year 2013 after the receipt audit objections u/s 148 in the year 2008.

15. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 24/05/2024.