Reopening of assessment beyond four years period invalid as material facts disclosed fully

VE Commercial Vehicles Ltd Vs DCIT (ITAT Delhi)

ITAT Delhi held that reopening of assessment beyond four years period is invalid as there was no failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment.

Facts-

The assessee has mainly taken up the issue of reopening of assessment under section 148 of the Income Tax Act. CIT(A) has ruled the decision in favour of the revenue. Being aggrieved, the present appeal is filed by the assessee.

Conclusion-

The Hon’ble Courts have in this context held that reassessment proceedings initiated beyond four years from the end of the relevant assessment year to be invalid in terms of the proviso to section 147 of the Act where there was no failure on the part of the assesses to disclose fully and truly all material facts necessary for assessment. The Courts have consistently held that where there was no failure on the part of the assessee to truly disclose all material facts and it was only a question of drawing an inference from these facts, reopening of assessment beyond the four years period is invalid.

Held that in the facts of the present case, the impugned notice under section 148 issued on 26.03.2018, i.e., after expiry of period of four years from the end of relevant assessment year, is beyond limitation in terms of the proviso to section 147 of the Act, no case could be made with regard to failure on part of assessee to disclose fully and truly all material facts.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the Assessee against the order of the ld. CIT(A)-9, New Delhi dated 3 1. 07 .2020.

2. Following grounds have been raised by the assessee:

“1. That the CIT(A) erred on facts and in law in upholding action of the assessing officer of reopening assessment u/s 147 of the Income Tax Act.

1.1 That the CIT(A) erred on facts and in law in sustaining the action of the assessing officer of reopening assessment proceedings which are barred by limitation of 4 years as provided in proviso to section 147 of the Income Tax Act.

1.2 That the CIT(A) erred on facts and in law in rejecting appellant contention that the reopening of the assessment proceedings by assessing officer are invalid and void ab initio as the reason to believe for reopening of assessment was not served to appellant within a reasonable time limit.

1.3 That the CIT(A) erred on facts and in law in rejecting appellant contention that reason recorded by assessing officer are defective as the same are undated and therefore re-assessment proceedings are invalid.

1.4 That the CIT(A) erred on facts and in law in sustaining the action of assessing officer of passing reassessment order u/s 147 and rejecting the contention of appellant that the procedure laid down by the honorable Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19 was not followed in the reassessment proceedings.

1.5 That the CIT(A) erred on facts and in law in sustaining the action of assessing officer in reopening the assessment u/s 147 which is mere change of opinion by assessing officer. The basis on which assessment order u/s 147 of the Income Tax Act has been passed is invalid.

1.6 That the CIT(A) erred on facts and in law in observing that the copy of the approval obtained from Pr. CIT-9, New Delhi u/s 151 of the Income Tax Act was provided to appellant before passing the assessment order u/s 147 of Income Tax Act.

1.7 That the CIT(A) erred on facts and in law in upholding the action of assessing officer of passing assessment order u/s 147 without disposing off the objections raised by the appellant in respect of reason to believe for reopening of assessment u/s 147 by passing appropriate order.

2. That the CIT(A) erred on facts and in law in upholding action of assessing officer in disallowing additional deduction of Rs. 14,98,00,000/- in respect of research and development expenditure u/s 35(2AB) of the Income Tax Act.

2.1 That the CIT(A) has grossly erred on facts and in laws in confirming disallowance of additional deduction of R&D without considering the submission filed by the appellant on the allow ability of additional deduction of R&D expenditure claimed u/s 35(2AB) of the Income Tax Act.

2.2 That the CIT(A) has grossly erred on facts and in laws in holding that competent authority (Department of Scientific and Industrial Research) decides the amount of additional deduction of R&D expenditure claimed u/s 35(2AB) of Income Tax Act.”

Deduction u/s 35(2AB): 

Reopening u/s 148:

3. The assessee company is engaged in the business of manufacturing & trading of commercial vehicles and components including gears, engineering solutions and providing services in relation to commercial vehicles.

The reasons recorded by the Assessing Officer for issue of notice u/s 148 are as under:

“Reasons for issue of notice u/s 148 for reopening of assessment u/s 147 of the Income Tax Act, 1961 for the A.y. 2012-13 in the case of M/s V.E. Commercial Vehicles Ltd.

Return for AY 2012-13 declaring income of Rs. 297,55,70,558/- was filed by the assessee company on 28.09,2012 The JCIT (OSD), Circle-26(1), New Delhi vide his order dated 18.04.2016 made several additions/disallowance in the return income and assessed at income of Rs. 575,09,21,452/- under the MAT provision. From the perusal of P&L account, computation of income and other details filed by the assessee company, it was seen that the assessee had claimed weighted deductions u/s 35(2AB) of Rs. 120.39 crores.

As per the provisions of section 35(2AB) and I.T. Rules, the assessee is required to furnish the report submitted b y the prescribed authority i.e. Department of Scientific and Industrial Research, which in the assessee case is given in the Form 3CL. From perusal of the copy of the form 3CL reported by the DSIR. It is seen that the approval for eligible expenditure for R&D u/s 35(2AB) is given only for Rs.10,541.69 lakhs. The deduction u/s 35(2AB) is admissible to the extent of Rs.10541.69 lakhs only. Thus, the assessee has claimed excess deduction of Rs.14.98 crores (calculated as below in the table).

From the perusal of Section 35(2AB) and rules, is is very clear that to claim deduction u/s 35(2AB), the assessee needs to take approval from the prescribed authorities which in the present case is DSIR. Further, the Rule 7A provides for taking approval of expenditure incurred on Research and Development from the Secretary DSIR. It is clearly provided that the assessee company will maintain and submit separate accounts to the DSIR in respect of the R&D expenditures and then after examining of the same, the DSIR will grant an approval to the assessee. Further, the rules also prescribes that after granting the approval for the expenditure, the DSIR will submit the report to the prescribed authority i.e. DGIT (Exemption) in Form 3CL u/s 35(2AB) of the I.T. Act. Thus, the Section 35(2AB) r.w.r. 6 & 7A clearly makes it mandatory for the assessee to seek the approval of the DSIR and being a technical agency, the act makes it very clear that any approval for the expenditure is to be granted by the DSIR and the same is binding on I.T. Authorities.

Further, the DSIR has been given the mandate to certify he actual and eligible expenditure incurred on R&D activities after due examination of the assessee account. Further, the DSIr is well within its right to consider some expenditure as ineligible for R&D expenses based on their own guidelines because being a technical agency they have more clear idea about the things which are used to research and development or otherwise and all this is necessary so that the concerns/companies do not take excess/ineligible deduction u/s 35(2AB)/35 of the I.T. Act.

Details of additional deduction claimed by the assessee and eligible deduction as per Form No. 3CL from the DSIR for the Assessment Year 2012-13 are listed as below:

In view of the above discussion and after going through the details of R&D deduction claimed by the assessee u/s 35(2AB) and the amount certified by the DSIR in Form No. 3CL u/s 35(2AB) of the Income Tax Act, 1961, I have reason to believe that the assessee has claimed the excess deduction u/s 35(2AB) to the tune of Rs.14.98 crores for the A.Y. 2012-13 and thus, this income has been escaped from the assessment.

Since, more than 4 years from the end of the relevant assessment year have elapsed approval of Pr. Commissioner of Income Tax Delhi-09, is solicited in terms of the Provisions of Section 151(1) of the Act.”

4. The assessee has taken up the issue of reopening at ground no. 1.1 to 1.7 before the ld. CIT(A). The ld. CIT(A) has ruled in favour of the revenue on the issue of Section Aggrieved with the order of the ld. CIT(A), the assessee has taken up the same issue at ground no. 1, 1.1 to 1.7 before us.

Arguments for the assessee

5. During the hearing, it was argued that the initiation of the  reassessment proceedings without any fresh tangible material is illegal. The main arguments are as under:

“Reasons recorded do not allege any failure on part of the  appellant to disclose material facts

The aforesaid reasons recorded for reopening the assessment merely states that DSIR, being the final authority for certifying R&D expenses for the purposes of section 35(2AB), approved expenses to the extent of Rs. 105.41 crores only in Form 3CL dated 19.11.2014 submitted to Chief Commissioner of Income tax (Exemption) and therefore, no deduction can be allowed for remaining expenses not approved/certified by the DSIR.

In the reasons recorded, the assessing officer, has, in fact, stated that on perusal of the profit and loss account, computation of income and other details filed by the appellant, it was observed that the appellant has claimed weighted deduction of  Rs. 120.39 crores under section
35(2AB) of the Act. There is no whisper whatsoever, in the entire reasons recorded as to any failure on part of the appellant to disclose any material fact in respect of issue(s) raised.   No instance of any failure has been expressed in the reasons recorded.

It has been held in the catena of cases that if the reasons recorded for reopening the assessment after expiry of four years from the end of the relevant assessment year, do not specify that the income has escaped assessment on account of default on failure on the part of the assessee to disclose material facts, the entire reassessment proceedings and the reassessment order would be invalid.”

6. The assessee has relied on the following judicial precedents in support of its contentions and various other case laws:

> Hon’ble Gujarat High Court in the case of Kaira District. Cooperative Milk Producers Union Ltd. vs. ACIT (1895) : 216 ITR 371

> Hon’ble Madras High Court in the case of Fenner India Ltd. vs. DCIT (Mad): 241 ITR 672.

> The Bombay High Court in the case of Hindustan Lever Ltd.: 268 ITR 332

> Decision of the Hon’ble Delhi High Court in the case of Haryana Acrylic Manufacturing Company vs. CIT: 308 ITR 38.

> CIT Vs. Indian Farmers Fertilizer Cooperative Ltd: 171 Taxman 379

7. Applying the aforesaid settled legal position to the facts of the present case, it was submitted that in view of the absence of any allegation of any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, the notice for reassessment issued under section 148 of the Act, after the expiry of four years from the end of the relevant assessment year is barred by limitation prescribed in proviso to section 147 of the Act, without jurisdiction and illegal, thus the captioned proceedings may kindly be dropped.

Disclosure of all material facts by the assessee

8. There was otherwise no failure on the part of the assessee to disclose fully and truly all material facts as explained hereunder:

• Computation of income: Detailed working of deduction of research and development claimed under section 35(2AB) of the Act has been provided along with computation of income filed during the course of assessment proceedings for the assessment year under consideration:
• Audited financial statement: Detailed disclosure of research and development expenses incurred during the year are provided in ‘notes to accounts: 31- Research and Development expenses’ to the audited financial statement for the year ending 31.03.2012.
• Tax Audit Report: Disclosure with respect to capital and revenue expenditure separately has been made in Annexure-V and Annexure-VI to the tax audit report for the assessment year under consideration.
• Response to specific query raised during original assessment proceedings: The Assessing Officer, during the course of original assessment proceedings, vide notice dated 11.02.2016, required the appellant to furnish specific details in relation to claim made under section 35(2AB) of the Act. In response, the appellant, vide reply dated 18.02.2016, submitted all documents/information alongwith a justification as to why research and development expenses incurred during the year are eligible for deduction under section 35(2AB) of the Act. Copy of reply dated 02.2016 enclosed at pages 74-107 of the paper book.

9. It will thus be appreciated that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment in relation to the claim made under section 35(2AB) of the Act, in as much as the same was disclosed in the return of income and In the financial statement/lax audit report and the same was also verified by the assessing officer during the course of the assessment proceedings under section 143(3) of the Act.

Arguments for the Revenue

10. Against the arguments of the ld. AR, the Departmental Representative argued extensively supporting the reopening of the case and reassessment completed thereof.

11. It was argued that it was true that assessment was completed in your case vide order dated 18.4.20 16. In the case of CIT vs. Kelvinator of India Limited 320 ITR 561, the Hon’ble Apex court has ruled that the Assessing Officer has no power to review but he has a power to re-assess. The Assessing Officer can re-open, 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 belief and the reasons are quite tangible. It was argued that from the perusal of P&L account, computation of income etc., it could be seen that the assessee company has claimed weighted deductions u/s 35(2AB) of the Act amounting to Rs.120.39 Later on it was came to the notice of AO that the deduction u/s 35(2AB) is claimed in excess by the assessee. Assessee has failed to bring to the notice of the AO as well as copy of the form 3CL of the DSIR was not provided at that time. As per this form 3CL, assessee is eligible for R&D only for Rs.10,541.69 lakhs which is in the assessee’s case. The AO, while recording his reason to believe, has calculated this excess claim. The claim of the assessee was more than mandated eligible claim for deduction u/s 35(2AB), as the assessee needs to take approval from the correct authority in this regard and DSIR is the correct authority here and not the Deptt. of Income Tax.

12. The ld. DR argued that the rule provides that the assessee company will maintain and submit separate accounts to the DSIR in respect of R&D expenditure and then after examining of the same, DSIR will giant necessary approval to the assessee. The rule further makes a    provision that after granting the approval for expenditure, DSIR will submit the report to DGIT (Exemption) in form 3CL u/s 35(2AB) of the Act. Thus, section 35(2AB) r.w.r 6 and 7A makes it mandatory for the assessee to seek approval of the of the DSIR and being a technical agency, the Act makes it very clear that any approval for the expenditure is to be granted by the DSIR only and that is binding on the Department of Income Tax for the purposes.

13. Therefore, it was argued that the Assessing Officer is correctly, has a reason to believe that the assessee company has claimed excess deduction u/s 35(2AB) to the tune of Rs.14.98 Cr. for the AY under consideration and thus income has escaped assessment to this extent.

14. The ld. DR relied in the case of Raymond Woolen Mills vs. ITO & Others 152 CTR 418 (SC), wherein the Apex Court held that in determining whether commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the department could reopen the case. The sufficiency or correctness of the material is not the thing to be considered at this stage. In the case of Yuvraj vs. Union of India 315 ITR 84 the Hon’ble High Court has ruled that points not decided while passing assessment order under section 143(3) not a case of change of opinion. In the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. 291 ITR 500 (SC), the Hon’ble Court has ruled that so long as the conditions of section 147 are fulfilled, the Assessing officer is free to initiate proceedings under section 147 and failure to take steps under section 143(3) will not render The Assessing Officer powerless to initiate reassessment proceedings.

15. Heard the arguments of both the parties and perused the material available on record.

Decision

16. In the reasons recorded for reopening the assessment, it is pertinent to mention, the Assessing Officer has not alleged that the assessee had failed to disclose full and true material facts in relation to the claim made under section 35(2AE) of the Act. In fact, the Assessing Officer, in the reasons recorded, has stated that on perusal of the profit and loss account, computation of income and other details filed by the assessee, it is observed that the assessee had claimed weighted deduction of Rs 120.39 crores under section 35(2AB) of the Act Relevant extract of the reasons recorded is as under:

“Return for AY 2012-13 declaring income of Rs. 297,55,70,558/- was filed by the assessee company on 28.09,2012 The JCIT (OSD), Circle-26(1), New Delhi vide his order dated 18.04.2016 made several additions/disallowance in the return income and assessed at income of Rs. 575,09,21,452/- under the MAT provision. From the perusal of P&L account, computation of income and other details filed by the assessee company, it was seen that the assessee had claimed weighted deductions u/s 35(2AB) of Rs. 120.39 crores.”

17. From the aforesaid, it is evident that the assessee had made true and full disclosure of the material facts as required by law and as necessary for assessment in relation the claim of research and development expenses made under section 35(2AB) of the Act. The obligation on the assessee qua full and true disclosure of material facts is with respect to ‘primary facts’ only and does not extend to suggesting inferences of fact and law that can be drawn from such disclosure.

18. The relevant provision of Section 147 reads 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:

Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.”

19. Section 147 of the Act authorizes an assessing officer to assess or reassess income chargeable to tax if he has reason to believe that the income for any assessment year has escaped assessment. The proviso to the aforesaid section, curtails the powers of the Assessing Officer to initiate reassessment proceedings beyond the period of 4 years from the end of the relevant assessment year, where the assessment has been completed under section 143(3) of the Act unless the income has escaped assessment by reason of the failure of the assesses to disclose fully and truly all material facts necessary for assessment.

20. The Hon’ble Courts have in this context held that reassessment proceedings initiated beyond four years from the end of the relevant assessment year to be invalid in terms of the proviso to section 147 of the Act where there was no failure on the part of the assesses to disclose fully and truly all material facts necessary for assessment The Courts have consistently held that where there was no failure on the part of the assessee to truly disclose all material facts and it was only a question of drawing an inference from these facts, reopening of assessment beyond the four years period is invalid.

21. Reliance is being placed on the following decisions:

> Calcutta Discount Co. Ltd. vs. ITO: 41 ITR 191 (SC).

> Hon’ble Bombay High Court in the case of German Remedies Ltd. vs. DCIT: 287ITR 494

> The Delhi High Court in the case of CIT vs. Motor & General Finance Ltd: 184 Taxman 465

> Hon’ble Gujarat High Court in the case of Austin Engineering Co. Ltd. vs. JCIT: 312 ITR 70

> CIT vs. Shri Tirath Ram Ahuja (HUF): 306 ITR 173 (Del.)

> Haryana Acrylic Manufacturing Company vs. CIT: 308 ITR 38 (Del.)

> Avtec vs. DCIT: 395 ITR 434 (Del.)

22. In the present case of the assessee, all primary facts in relation to deduction of research and development expenses aggregating to Rs. 120.39 crores was claimed under section 35(2AB) of the Act were disclosed in as much as appropriate disclosure was made in the computation of income, audited financial statements, tax audit report and reply dated 18.02.2016 filed in response to notice dated 02.2016 issued during the course of original assessment proceedings. Being so, no failure to disclose any material fact could be attributable to the assessee.

• In the instant case, the assessment has been completed by the JCIT vide order 18.04.2016.
• The issue of deduction u/s 35(2AB) has been enquired into by the DCIT vide notice dated 11.02.2016.
• The assessee has replied to the queries raised vide reply dated 18.02.20 16.
• The order of the approval u/s 35(2AB) dated 11.2012 was filed before the AO.
• The Form No. 3CM dated 10.2017 issued by Ministry of S&T has been filed before the AO.

23. In the facts of the present case, the impugned notice under section 148 issued on 26.03.2018, i.e., after expiry of period of four years from the end of relevant assessment year, is beyond limitation in terms of the proviso to section 147 of the Act, no case could be made with regard to failure on part of assessee to disclose fully and truly all material facts. Applying the aforesaid settled legal position to the facts of the present case, the notice issued without specifying as to what primary facts which the assessee was required to disclose but did not disclose, assumption of jurisdiction for reopening of re-assessment u/s 147 of the Act is bad in law and void-ab-initio.

24. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 11/10/2022.