Reopening of assessment without any fresh tangible material unsustainable

Nainudevi A. Prajapati Vs ITO (ITAT Ahmedabad)

ITAT Ahmedabad held that reopening of assessment under section 147 of the Income Tax Act initiated on a mere change of opinion without any fresh tangible material unsustainable in law.

Facts- The assessee filed return of income u/s. 139(1) of the Act declaring total income of ₹ 4,50,177/-. The case was selected for scrutiny and assessment order u/s. 143(3) of the Act was passed on 30-12-2011, determining the total income at ₹ 10,39,054/-. After the assessment, it was discovered by the assessing officer that while estimating the income of the assessee, the then assessing officer had failed to add the sundry creditors of ₹ 1,63,03,871/- to the total income of the assessee, even though, the assessee had failed to furnish details and evidence of their genuineness. Therefore, the assessing officer had reason to believe that income to the tune of ₹ 1,63,03,871/- had escaped assessment and the case was reopened u/s. 147 of the Act. The assessee failed to furnish the return of income in response to notice u/s. 148 of the Act. Assessment u/s. 143 (3) r.w.s 147 of the Act was completed on 31-03-2014, determining total income at ₹ 1,77,91,657/- after addition of sundry creditors of ₹ 1,63,03,871/-. Aggrieved by the assessment order, the assessee preferred appeal before CIT (Appeals), who dismissed the appeal of the assessee.

Conclusion- In absence of any such fresh tangible material, the re-opening cannot be resorted to since the same would amount to “mere change of opinion”. Further, the Supreme Court held that “mere change of opinion” cannot be per se “reason to reopen” the assessment proceedings which have already been concluded.

Held that in the instant facts the re-assessment proceedings have been initiated on a “mere change of opinion” and hence the same are not liable to be sustained. Accordingly, we direct, that the re-assessment order having been passed on “mere change of opinion” is liable to be quashed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax(Appeals)-5, (in short “Ld. CIT(A)”), Vadodara in Appeal No. CAB/5-277/2014-15 vide order dated 10.08.2015 passed for Assessment Year 2009-10.

2. The assessee has taken the following grounds of appeal:-

“1. That the learned CIT(A) erred in law and on facts in confirming the addition of Rs.1,63,03,871/- made by the Assessing Officer on account unexplained creditors. That on the facts and circumstances of the case, as also in law, the said addition is grossly unjustified and deserves to be deleted in appeal before the Hon’ble Tribunal.

The appellant requests that leave be granted to add, alter, amend or withdraw any ground of appeal on or before final hearing of the appeal.”

3. Further, the assessee has also taken the following additional ground of appeal before us:

“1. The notice issued u/s. 148 and consequential reassessment order passed u/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 dated 31.03.2014 are bad in law for the want of valid jurisdiction to issue notice u/s. 148 of the Act.

2. The challenge to the reassessment notice and reassessment order being a jurisdictional challenge is being taken up before the Hon’ble ITAT on the basis of the well laid down ratio by the Hon’ble Jurisdictional High Court in the case of P.V. Doshi vs. CIT – (1978) 113 ITR 22 (Guj).

The appellant reserves it right to add, amend, alter or modify any of the grounds stated hereinabove either before or at the time of hearing.”

4. The brief facts of the case are that the assessee filed return of income under Section 139(1) of the Act declaring total income of ₹ 4,50,177/-. The case was selected for scrutiny and assessment order under Section 143(3) of the Act was passed on 30-12-2011, determining the total income at ₹ 10,39,054/-. After the assessment, it was discovered by the assessing officer that while estimating the income of the assessee, the then assessing officer had failed to add the sundry creditors of ₹ 1,63,03,871/- to the total income of the assessee, even though, the assessee had failed to furnish details and evidence of their genuineness. Therefore, the assessing officer had reason to believe that income to the tune of ₹ 1,63,03,871/- had escaped assessment and the case was reopened under Section 147 of the Act. The assessee failed to furnish the return of income in response to notice under Section 148 of the Act. Assessment under Section 143 (3) r.w.s 147 of the Act was completed on 31-03-2014, determining total income at₹ 1,77,91,657/- after addition of sundry creditors of ₹ 1,63,03,871/-. Aggrieved by the assessment order, the assessee preferred appeal before CIT (Appeals), who dismissed the appeal of the assessee with the following observations:-

“5.3 I have carefully considered the facts and the circumstances of the case, observations of the Assessing Officer, submissions of the assessee, material available on the record and the relevant judicial pronouncements on the subject. It is not denied in this case that the assessee had maintained books of accounts, which were audited. It is also noticed that the assessee had refused to furnish the said books of accounts before the Assessing Officer on the plea that the same were destroyed in fire. Absolutely no evidence regarding the genuineness of the sundry creditors was furnished by the assessee either at the assessment stage or during the appellate proceedings. The assessee has all along only asserted that she had filed her Return of Income as per the provisions of section 44ad and once her income has been assessed on estimate basis, no further addition can be made on account of non-genuineness of the sundry creditors u/s 68 of the Act.

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5.9. In view of the above discussion, it is clear that the assessee has failed to discharge the burden of primary onus cast on her to establish either the identity or creditworthiness of the alleged creditors and has also failed to prove the genuineness of the transactions. Further, in view of the decision of Hon’ble Allahabad High Court in the case of G.S. Tiwari & Co. (supra), the Assessing Officer is competent to make additions both u/s 44AD and u/s 68 of the Act in the same case in the same year. Therefore, the sundry creditors of Rs. 1,63,03,871/- are held to be unexplained and the order of the Assessing Officer in this regard is upheld. The assessee fails on these grounds of appeal.”

5. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) confirming the additions. Before us, the counsel for the assessee submitted that the re-assessment proceedings are liable to be set aside on the ground that the same amounts to “change of opinion”, since the issue of sundry creditors, on the basis of which additions have been made in the re-assessment proceedings, was raised and discussed in detail during the course of the original assessment proceedings. The counsel for the assessee drew our attention to notice dated 06-09-2011 issued by the assessing officer during the course of assessment proceedings, in which the issue regarding “sundry creditors” was raised during the course of original assessment proceedings. The counsel for the assessee then drew our attention to reply of the assessee dated 8^th November 2011, which was the response filed by the assessee against the aforesaid notice issued by the assessing officer. Further, the counsel for the assessee submitted that the issue of “sundry creditors” being unverifiable was raised by the assessing officer vide notice dated 20-12-2011 and the assessing officer, after taking into consideration the facts of the case estimated the income @ 5% of the total turnover, on the ground that due to non-production of books of accounts for verification the plea of the assessee to adopt 2% was rejected and the Assessing Officer proceeded to determine total income @ 5% of the total turnover. Therefore, the counsel for the assessee submitted that this is case of “change of opinion” on the part of the assessing officer since the same issue regarding non-verification of “sundry creditors” was raised during the original assessment proceedings and the assessment order was also framed by taking into consideration the fact that the sundry creditors remained unverifiable. Therefore, it is not permissible for the assessing officer to again initiate 147 proceedings on the same set of facts, which would amount to “change of opinion”, given the facts of the instant case.

6. In response, the Ld. DR placed reliance on the observations made by the Ld. CIT(Appeals) in the appellate order.

7. We have heard the rival contentions and perused the material on record. On going to the facts of the case, we observe that in the reasons recorded for issue notice under Section 148 of the Act, the assessing officer has mentioned that the reason why the instant case has been reopened is that the scrutiny of records reveal that the assessee has furnished no supporting evidence regarding genuineness of 9 sundry creditors for amount involved of ₹ 1,63,03,871/-. This shows that assessee had misrepresented facts in the return of income and had concealed the real income. However, we also observe from notice dated 06-09-2011 and in the notice dated 20-12-2011, that the assessing officer had specifically raised the issue regarding the closing balances shown under the head “sundry creditors” and had enquired that since the same are unverifiable, the same should be added to the total income of the assessee. Further, even while passing the assessment order, the assessing officer has specifically taken note of the fact that certain sundry creditors remained unverifiable, and accordingly, the assessment order was framed taken into consideration the aforesaid fact. It would be useful to reproduce the relevant extracts of the original assessment order for reference:-

“3. On perusal of balance sheet it is seen that the assessee has shown Rs. 16303871/- under the head “Sundry Creditor”. To verify the genuineness of the balances as reflected against the name of the party the assessee vide questionnaire dated 07/07/2011 at point No. 2 (vii) was asked to furnish complete address of the sundry creditors. The authorized representative has submitted the name and address of the sundry creditors. The notices u/s 133(6) of the IT Act were issued to the following parties:

3.1 All the notices issued u/s. 133(6) were returned back unserved with the remarks ‘not known’ or ‘left’. The assessee vide show cause notice dated 06/09/2011 was asked to explain that as to why the closing balance shown under the head “sundry creditors” may be treated as unverifiable in nature and included to the income of the assessee. In this regard no response from the assessee side has been received. Therefore again a show cause notice dated 18/10/2011 was issued and served to the assessee wherein also it was conveyed that the assessee failed to prove the genuineness of the purchases made with the said parties and was requested to produce copies of original bills of purchases made with the above party, copy of bank statement reflecting the payment made to them and also requested to produce original sales bills and mode of receipt payment from them. In response to show cause letters the assessee has submitted a letter dated 01/11/2011 (as per Annexure-1 to this order).

3.2. From the above it is confirmed that the assessee has made bogus sales and purchases to accommodate buyers and sellers. It is also further confirmed that the assessee has never made any actual business but the figures as reflected in the balance sheet and profit and loss account are manipulated. Further the assessee has not furnished any documentary evidences for verification in respect of the argument that the papers were destroyed due to fire.

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3.8 The assessee vide her reply dated 27/12/2011 submitted in this office on 29/12/2011 which reproduced hereunder:

The profit at the rate of 5% of Rs. 1606786/- includes profit of Rs. 508232/- disclosed in the audited balance sheet after deducting bank interest of Rs. 1440/-. By making addition on and above disclosed income would tantamount to double taxation to the extent of Rs 508232/-. Thus addition at the most, if required at the proposed rate need to be restricted to Rs. 1098554/-. This submission for addition of Rs. 1098554/-is without prejudice to the following facts.

Your assessee is dealing in faros and non faros metals where trading margin is quite thin. Average profit margin disclosed in these kind of trade works out somewhere 1.5 to 2% only, therefore, maximum addition if any could be Rs. 134482/- on an above the disclosed income from trading activity of Rs. 505232/- Your assessee has carried out business activity for which complete quantity details are maintained. Your assessee is duly registered with the VAT authorities and have filed regular VAT returns wherein no discrepancies has been noticed either in respect of quantity or in respect of value. On the identical facts huge disallowance was made by the assessing officer in the case of Sun Steels which was dealing in the similar kind of items taking gross profit at 3.36%. The Hon’ble ITAT after appreciating the facts of the case retained addition of Rs. 50,000/- only as there was no evidence on the records of the AO that the parties from whom the material has been purchased and to whom the money was paid came back to the assessee and as such it a wrong to assume the assessee was beneficiary of such funds.

In view of this, I request your honour not to proceed with making of addition at the rate of 5% of the sale turnover but request you to restrict the sale at the rate of 2% of sales turnover less income disclosed in the return of income.

3.9. The submission of the assessee has been duly considered and not tenable. As discussed in the foregoing that since the issuance of notice u/s. 142(1) dated 02/08/2011 the assessee is non co-operative with the departmental proceedings. The assessee was requested at Point No. 3(iv) of the questionnaire to produce books of accounts along with bills and vouchers for the expenses debited to P&L account and cash book. The assessee never bothered to produce the books of accounts, bills and vouchers for verification. Therefore summons u/s 131 of the IT Act was issued to the assessee on 11/11/2011 requiring her to present in the office of the undersigned on 17/11/2011 at 3.00 PM to give evidence and to produce either personally or through an authorized representative, the books of account or other documents. The assessee has not responded to the summons. Again on 25/11/2011 summons u/s 131 of the IT Act was issued to the assessee requiring her to present in the office of undersigned on 02/12/2011. This summons also she has not responded. It is totally negligence on the part of the assessee which proves that she is not willing to come forward with documents substantiating her claim that trading business she carried out during the previous year under assessment as genuine. Further in her letter dated 01/11/2011 she confessed that she has neither purchased any material from supplier nor made actual sales to customers but provided accommodation bills and at the end she apologized not to prove genuineness of purchase of transaction. The assessee totally failed to produce books of account and relevant documents for verification of the correctness of the accounts. The plea of the assessee in her reply dated 27/12/2011 is not acceptable on the ground that the assessee is in practice of providing bogus trading. On the other hand the assessee accepted in her reply dated 27/12/2011 at point No. 1 that the profit @ 5% of Rs. 1606786/-includes profit of Rs. 508232/- disclosed in the return of income. In the last para of this letter it is plead by the assessee that please accept 2% of profit instead of 5% as proposed. But in view of the foregoing discussion and non production of books of accounts for verification the plea of the assessee to adopt 2% is rejected and 5% profit is adopted. Hence considering the fact of the case and request of the assessee to reduce the profit disclosed at Rs. 508232/- the total Income @ 5% of the total turnover disclosed worked out as under.”

8. Accordingly, it is observed that the issue regarding “sundry creditors” remaining unverifiable was specifically enquired into during the course of original assessment proceedings. Therefore, in our considered view, the assessing officer cannot resort to the same issue and make additions to the total income on the very same ground/issue for consideration, which has been considered and enquired into detail during the course of original assessment proceedings and which formed the basis of framing of original assessment order.

9. In the case of Kelvinator India Ltd. 187 taxmann 312, the Hon’ble Supreme Court has categorically held that “change of opinion” is an in-built test to check abuse of power by the Assessing Officer. Hence, for the purpose of re-opening of assessment, there has to be some fresh tangible material which was not available with the Assessing Officer at the time of original assessment proceedings. In absence of any such fresh tangible material, the re-opening cannot be resorted to since the same would amount to “mere change of opinion”. Further, the Supreme Court held that “mere change of opinion” cannot be per se “reason to reopen” the assessment proceedings which have already been concluded. The Hon’ble Supreme Court made the following observations on this issue:

“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 re-assess. 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 1-4-1989, 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 re-introduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer.”

10. The aforesaid decision was also followed by the Hon’ble Delhi High Court in the case of Usha International Ltd. 210 taxmann 188, wherein the Delhi High Court held that when the Assessing Officer completed an assessment under Section 143(3) of the Act, he is presumed to have accepted the contentions of the assessee even if there is no express reference to them in the assessment order and if within 2 years he issues a notice to re-open the assessment, it is nothing but a change of opinion. Further, the Delhi High Court in the aforesaid decision held that assessment proceedings cannot be validly reopened under Section 147 of the Act even within 4 years, if the assessee has furnished full and true particulars at the time of original assessment with reference to the income alleged to have escaped assessment, if the original assessment was made under Section 143(3) of the Act. While passing the order, the Delhi High Court made the following observation:-

“Reassessment proceedings will be invalid in case an issue or query is raised and answered by assessee in original assessment proceedings and Assessing Officer does not make any addition in assessment order. In such situations it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons.”

11. The assessee further relied upon the decision of the Hon’ble High Court of Madras in the case of ITO vs. Shivsu Canadian Clear Waters Ltd 133 taxmann.com 280 (Madras). While passing the order the Hon’ble Madras High Court observed as under:-

“…reassessment was initiated on ground that assessee had issued preference shares of face value of Rs. 10 each at premium of Rs. 488 per share but market value of each share was Rs. 25.20 only and consideration received from issue of shares which exceeded face value of such shares was required to be assessed to tax under Section 56(2)(viib). However, no tangible material or fresh material had come to notice of Assessing Officer, and further Assessing Officer had, in fact, made a modification to valuation of first lot of shares during original assessment. The High Court held that on facts, reassessment was not justified.”

12. The assessee further relied on the decision of Hon’ble High Court of Bombay in the case of Bhavani Gems (P.) Ltd. vs. ACIT 138 taxmann.com 537 (Bombay). While passing the order the Hon’ble Court observed as under:-

“…where assessment was sought to be reopened in case of assessee on ground that assessee had issued shares at excess premium which was required to be added to assessee’s income under Section 56(2)(viib), however, very issue of share premium was a subject matter of consideration by Assessing Officer during original assessment proceedings and assessee had provided working of fair value of equity shares as per rule 11UA, reopening of assessment being a mere change of opinion was not justified.”

13. In light of the above facts as noted by us and the judicial proceedings on the subject, including the observations made by the Hon’ble Supreme Court in the case of Kelvinator India Ltd. (supra), we are of the considered view that in the instant facts the re-assessment proceedings have been initiated on a “mere change of opinion” and hence the same are not liable to be sustained. Accordingly, we direct, that the re-assessment order having been passed on “mere change of opinion” is liable to be quashed.

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

This Order pronounced in Open Court on 11/08/2023