Reopening beyond 4 years of assessment u/s 143(3) without allegation of non-disclosure is untenable

Gokaldas Exports Vs DCIT (ITAT Bangalore)

ITAT Bangalore held that reopening beyond the period of 4 years of completion of assessment u/s 143(3) without allegation regarding non-disclosure of full and true material facts is bad-in-law.

Facts- The case was selected for scrutiny and statutory notices were issued to the assessee. In response to the notice assessee filed details. After considering the submissions of the assessee the Assessing Officer (AO) passed order under Section 143(3) of the Act on 15.03.1998. The case was reopened under Section 147/148 of the Act by issuing notice dated 30.07.2001 after recording reasons.

In pursuant to the notice issued u/s. 148 of the Act the assessee filed ROI. The assessee filed revised return of income declaring Nil income. Thereafter the AO issued other statutory notices and he observed that the transfer of capital assets to the partners would amount to transfer of capital assets which would attract capital gain u/s 45(4) of the Act. The assessee filed reply and after considering the documents filed before the AO he passed the order.

Conclusion- Held that there is no allegation upon the assessee regarding not disclosing fully and truly all material facts for completion of assessment which is necessary in the case of reopening beyond the period of 4 years in the case of assessment completed u/s 143(3) of the Act. Since the case relates to AY 1995-96 and the notice has been issued by the AO on 30.07.2001, we observe from the notice that necessary ingredients, which were required to be mentioned for reopening beyond the period of 4 years has not been mentioned. Accordingly we uphold that the reasons recorded by the AO for exercising jurisdiction u/s. 147 is not in conformity with the provisions of Section 147 of the Act. Accordingly we uphold that the order passed by the AO is bad in law for want of fulfilling the necessary ingredients for exercising jurisdiction under Sections 147/148 of the Act.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal by the assessee is directed against the order of the CIT(A)-1, Bangalore dated 31.03.2004 for AY 1995-06. This is the third round of proceedings before the Tribunal in pursuant of the judgement of the Hon’ble Jurisdictional High Court in ITA No. 635 of 2016 order dated 19.07.2022 which is placed on record on pages 164 to 176 of the paper book.

2. The assessee filed additional grounds before the Tribunal on 27.03.2023 challenging legal as well as other issues as under: –

“1. The notice issued under section 148 of the Act is invalid in law without obtaining the sanction as per provisions of section 151(1) of the Act on the facts and circumstances of the case.

2. The mandatory conditions to assume jurisdiction under section 147 of the Act does not exist for issue of notice under section 148 of the Act on the facts and circumstances of the case.

3. The reasons recorded for issue of notice under section 148 of the Act without making any allegation that the appellant has failed to disclose fully and truly all material facts necessary for the assessment as per proviso to section 147 of the Act makes the proceedings of issue of notice under section 148 of the Act is bad in law and without jurisdiction on the facts and circumstances of the case.

4. The assessment reopened under section 148 of the Act based on the audit objection is invalid in law on the facts and circumstances of the case.

5. The notice issued under section 148 of the Act and order passed under section 143(3) r.w.s 147 of the Act in the name of the partnership firm which was not in existence is invalid in law on the facts and circumstances of the case.

6. Without prejudice whether any capital gains arises when the assets have been transferred at book value and consequently no capital gain is computable on the facts and circumstances of the case.

7. Without prejudice the authorities below were not justified in assessing the firm after it has ceased to exist on the facts and circumstances of the case.

8. The value adopted by the Assessing officer is not correct on the facts and circumstances of the case.

9. The appellant craves leave of this Hon’ble Tribunal, to add, alter, delete, amend or substitute any or all of the above grounds of appeal as may be necessary at the time of hearing.

10. For these and other grounds that may be urged at the time of hearing of appeal, the appellant prays that the appeal may be allowed for the advancement of substantial cause of justice and ”

3. The brief facts of the case are that the assessee company, engaged in the business of garment exports, filed return of income for the impugned assessment year on 31.10.1995 declaring total income of Rs.73,45,020/- which was processed under Section 143(1) of the Income Tax Act, 1961 (the Act). The case was selected for scrutiny and statutory notices were issued to the assessee. In response to the notice assessee filed details. After considering the submissions of the assessee the Assessing Officer (AO) passed order under Section 143(3) of the Act on 15.03.1998. The case was reopened under Section 147/148 of the Act by issuing notice dated 30.07.2001 after recording reasons. The reasons recorded by the AO ( typed copy) reads as under: –

“30.7.2001: For the Asst Year 1995-96 the assessee filed its return on 31.10.95 returning income of Rs. 73,45,020/-. The said return was processed on 29.3.96 u/s 143(1)(a) determining the income at Rs. 76,06,706/-. Order u/s 143(3) was passed on 16.3.98 enhancing the income to Rs. 1,71,63,064/-.

It is seen that the assessee has reduced an amount of Rs. 12,46,895/- from land value as per depreciation schedule. The following landed properties are purportedly deleted from the said schedule:

The Actual cost or book value of the land has been reduced without offering the difference between cost and market value as on date of transfer, in the form of capital gains, thereby evading capital gains tax.

The assessee firm has been dissolved w.e.f. 30.3.95 and the firm has been converted into a company. The assets of the firm required to be valued at market value and the difference between book value and market value required to be considered for computing taxable capital gains.

I therefore have reason to believe that capital gains amounting to Rs. 1,50,83,051/- on account of transfer of land and further on account of transfer assets has escaped assessment within the meaning of Sec. 147. Notice u/s 148 issued.”

In pursuant to the above notice issued under Section 148 of the Act the assessee filed return of income. The assessee filed revised return of income declaring Nil income. Thereafter the AO issued other statutory notices and he observed that the transfer of capital assets to the partners would amount to transfer of capital assets which would attract capital gain under Section 45(4) of the Act. The assessee filed reply and after considering the documents filed before the AO he passed the order. Since the matter before us is in third round, we think that there is no need to reproduce the in between events which are already decided by the Hon’ble Jurisdictional High Court.

4. The learned A.R. reiterated the submissions made before the lower authorities. He submitted that the proceedings initiated by the AO since the inception of the appeal suffer from many illegalities. The learned A.R. submitted that there is complete change of opinion by the AO since the assessment was completed originally under Section 143(3) of the Act and the same issues were questioned during the 143(3) proceedings by way of notice issued under Section 143(2) at Sr. No. 16 vide questionnaire dated 08.01.1998 and reply was also filed by the assessee and the AO after considering the submissions did not make any addition on the disputed point. The learned A.R. also submitted that reopening has been done on the basis of audit objection which itself is change of opinion and in support of his argument he relied on the judgements placed on record. The learned A.R. further submitted that copy of reasons recorded is vague and in the reasons recorded there is no allegation upon the assessee for not disclosing fully and truly all material facts which were necessary for completion of the assessment which is a necessary ingredient for exercising jurisdiction under Section 147/148 of the Act. The case has been reopened beyond the period of 4 years, therefore, it is necessary on the part of the AO to make allegation upon the assessee for not disclosing fully and truly all material facts. Therefore, exercising of jurisdiction under Section 147/148 of the Act is illegal. Once the notice is illegal the entire reopening proceedings framed by the AO in pursuant to the requirement of law is null and void. In support of his argument the learned A.R. relied on the following judgements: –

“i) Indian Oil Corporation v. ITO (1986) 159 ITR 956 (SC)

ii) ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC)

iii) Sitara Diamond (P.) Ltd. v. DCIT (2012) 345 ITR 91 (Bom.)

iv) Multiscreen Media (P.) Ltd v. UOI (2010) 324 ITR 48 (Bombay)

v) Hindustan Level Ltd. v. R.B. Wadkar (2004) 268 ITR 332 (Bom.)

vi) CIT v. Ankit C Maheshwari (2014) 366 ITR 146 (Guj.)

vii) CIT v. Hewlett Packard Digital Global Soft Ltd. in ITA No. 406/2007 dated 19.09.2011

viii) CIT v. M/s. Fibres & Fabrics Internationa! Pvt. Ltd. in ITA No. 310/2015 dated 22.09.2015

ix) ACIT v. Kotarki Constructions Pvt. Ltd, in W.P. No. 842 of 2018 dated 30.03.2021

x) CIT v. Motor Industries Co. Ltd. in ITA No. 220/2009 dated 15.12.2014

xi) CIT v. Chaitanya Properties Pvt. Ltd. (2016) 67 com201 (Kar.)”

5. On the other hand, the learned D.R. relied on the orders of the lower authorities and he submitted that there is no mention of the firm being converted into company in the return of income filed on 31.10.1995. Thus there is a failure on the part of the assessee to make full and true disclosure. Therefore provisions of Section 147/148 of the Act are clearly applicable and issuance of notice under Section 148 of the Act is perfectly followed. In the proceedings before lower authorities the assessee itself has accepted that the firm has been converted into a joint stock company w.e.f. 03.04.1995 under Section 556 of the Companies Act and just before the dissolution of the assessee firm has transferred certain immovable properties to its partners which are clear from the assessment order. To examine the applicability of Section 45 of the Act certain material facts like date of conversion of the firm into joint stock company, date of transfer of assets to the partners, market value of such assets, value at which the assets were transferred to the partners, cost of said assets, etc. should have been disclosed by the assessee. Failure to disclose these primary material facts either in the return of income or during the course of original assessment proceedings will bring the case within the proviso to Section 147 of the Act. In absence of the above mentioned material before the AO at the time of original assessment it cannot be said that the AO had formed own opinion about applicability of the provisions of Section 45(4) of the Act to such transfer. Therefore, the question of change of opinion does not arise. He further submitted that the information given by the Revenue audit does not constitute information and is not relevant to the issue of validity of reopening in view of the changes brought to Section 147 of the Act. As per the provisions for reopening the assessment is that the AO should have reasons to believe that income chargeable to tax has escaped assessment. Therefore, the AO was justified in reopening the case of the assessee under Section 147/148 of the Act. He further submitted that the primary facts of the case for exercising jurisdiction is that there should be escapement of income in the opinion of the AO and the assessee has not disclosed fully and truly all material facts as per the opinion of the AO. Accordingly, he submitted that the order of the lower authorities to be restored.

6. In the rejoinder the learned A.R. submitted that the conversion of the firm into company took place only on 03.04.1995 and there was no obligation on the part of the assessee firm to declare the said information in the return of income for the year ending 31.03.1995.

7. After hearing the rival contention and perusing the entire material available on record and the orders of the authorities below, we noted that this case is posted before the Tribunal for the third time. The assessee has raised additional grounds cited supra in which ground No. 3 states that in the reasons recorded for issuance of notice under Section 148 of the Act there is no allegation that the assessee had not disclosed fully and truly all material facts necessary for assessment as per the proviso to Section 147 of the Act makes the proceedings of issue of notice under Section 148 of the Act is bad in law. We have gone through the copy of reasons recorded cited supra, which is placed on page 76 and translated copy on page 77 of the paper book. We do not find anywhere in the copy of reasons recorded that there is any allegation upon the assessee regarding not disclosing fully and truly all material facts for completion of assessment which is necessary in the case of reopening beyond the period of 4 years in the case of assessment completed u/s 143(3) of the Act.. Since the case relates to AY 1995-96 and the notice has been issued by the AO on 30.07.2001, we observe from the notice that necessary ingredients, which were required to be mentioned for reopening beyond the period of 4 years has not been mentioned. Accordingly we uphold that the reasons recorded by the AO for exercising jurisdiction under Section 147 is not in conformity with the provisions of Section 147 of the Act. Our decision is supported by the judgements relied on by the learned A.R. Accordingly we uphold that the order passed by the AO is bad in law for want of fulfilling the necessary ingredients for exercising jurisdiction under Sections 147/148 of the Act. On this basis we allow ground No. 3 raised by the assessee. Since this is a legal ground and we have decided one legal ground in favour of the assessee, we think there is no need to decide the other issues raised by the assessee which are left open.

8. In the result, the appeal filed by the assessee is partly allowed in above terms.

Order pronounced in the open Court on 31^st March, 2023.