Reopening of assessment unsustainable as prerequisite for reopening beyond four years not fulfilled

DCIT Vs Gujarat State Road Development Corporation Ltd (ITAT Ahmedabad)

ITAT Ahmedabad held that reopening of assessment under section 147 of the Income Tax Act is unsustainable as prerequisite laid down in law for reopening of the case beyond four years is not found to be fulfilled.

Facts- The reopening had been resorted to by an order passed in terms of provision of section 147 of the Act on an identical issue. The addition so made by the AO had been challenged before the ld.CIT(A) both on legal ground challenging validity of the assessment framed ,as well as on merits of the additions made; that the ld.CIT(A) while deleting the addition made on merits found no merit in the legal ground raised by the assessee. Against this order of the ld.CIT(A), the Revenue has filed appeal challenging deletion of addition on merits by the ld.CIT(A) while the assessee has come in cross-objection raising legal ground before us.

Conclusion- The material fact in this case is the incurrence of expenditure, which the assessee has clearly disclosed. The assessee has also clearly disclosed all facts relating to the government grants received and also its treatment. Moreover, as rightly pointed out by the ld.counsel for the assessee, it is not even the case of the AO that the assessee had failed to disclose truly and fully all material facts relating to incurrence of expenditure, claimed as revenue by the assessee.

Held that prerequisite laid down in law for reopening of the case beyond four years is not found to be fulfilled in the present case. The reopening by the AO therefore, we hold, in both the cases is without jurisdiction; the assessment orders, therefore, passed as a consequence are invalid and directed to be set aside.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These appeals have been filed by the Revenue and Cross Appeals by the assessee against order passed by the ld.Commissioner of Income Tax(A), Gandhinagar, Ahmedabad of even dated 8.8.2019 passed under section 250(6) of the Income Tax Act, 1961 [hereinafter referred to as “the Act” for short]for the Asst.Year 2011-12 and 2012-13.

2. At the outset, it was pointed out that in both the cases, reopening had been resorted to by an order passed in terms of provision of section 147 of the Act on an identical issue. The addition so made by the AO had been challenged before the ld.CIT(A) both on legal ground challenging validity of the assessment framed ,as well as on merits of the additions made; that the ld.CIT(A) while deleting the addition made on merits found no merit in the legal ground raised by the assessee. Against this order of the ld.CIT(A), the Revenue has filed appeal challenging deletion of addition on merits by the ld.CIT(A) while the assessee has come in cross-objection raising legal ground before us. It was common ground that reopening was resorted to on identical issue on both the cases, and therefore, both the appeals are taken together for hearing and adjudication.

3. We shall first deal with the COs filed by the assessee together, since the reopening was resorted to in both the years on an identical issue, and arguments of the ld.counsel for the assessee in both the years against re-opening were also identical. Since identical issues have been raised by the assessee in the CO, for the sake of convenience the grounds raised in the Asst.Year 2011-12 in CO No.3/Ahd/2020 are reproduced as under:

“The Learned CIT(A) has erred in dismissing all the grounds raised against reopening of the assessment.

It is submitted that applying the principle laid down by Supreme Court in the case of CIT Vs. V. Corporation Bank Limited 254 ITR 791, the appellant has disclosed truly and fully fact in Note no. 6 of the Annual Report of the Company. There is no failure on the part of the appellant to disclose fully and truly the material facts necessary for the assessment year and hence re-assessment notice u/s 147 which is issued beyond 4 years is bad in law and is required to be quashed. The appellant relies on decision of Jurisdictional High Court of Gujarat in the case of Lincoln Pharmaceuticals Limited 375 ITR 561 (Gujarat).

It is also submitted that re-opening cannot be done when all the material facts of which reassessment has been opened was filed at the time of original assessment vide its letter dated 01.11.2013 and 09.01.2014. The Learned CIT (A) has erred in not considering the decision Hon. Supreme Court in case of CIT Vs Kelvinator of India Ltd. (2002) 256 ITR 1 (Del.) (FB) (Asst. Yr 1997-198) approved by Supreme Court in (2010) 320 ITR 561 (SC). It is also submitted that Ld. A.O. has not disposed off objection by passing a speaking order. The Ld. CIT (A) has erred in not considering the decision of Hon’ble Supreme Court in case of GKN Driveshafts Ltd which prescribed the procedure to deal with the initial objections raised against the issuance of notice u/s 148 of the Act.

It is also submitted that re-assessment cannot be done on the basis of audit objections. The Honourable Apex Court held that the re-assessment based on opinion of audit party is not valid CIT Vs. Lucas TVS Ltd.249 ITR 306 (SC). Similar view has been taken in the following cases:

• Idea Cellular Ltd. V DCIT (2008) 301 ITR 407 (Bom)
• CIT V. Foramer France [2003] 264 ITR 566 (SC) (para 2)

4. The ld.counsel for the assessee began his arguments by stating that primary challenge to the assumption of jurisdiction in the present case by the AO to frame assessment under section 147 of the Act was that the reopening having been resorted to beyond four years from the end of the relevant assessment years in both the cases, it was in contravention to the very basic condition required by law for reopening the case beyond four years ,of the assessee having failed to disclose fully and truly of material facts necessary for that assessment year as per first proviso to section 147 of the Act. He first drew our attention to the first proviso to section 147 as under:

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:

5. Referring to the same, he pointed out that as per lawwhere initially assessment has been framed u/s 143(3) of the Act and reopening is to be undertaken after expiry of four years from the end of the relevant assessment year, there has to be a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for that year. He drew our attention to the decision of Hon’ble jurisdictional High Court in the case of Pr.CIT Vs. Pr.CIT Vs. Lincoln Pharmaceuticals Ltd., (2015) 375 ITR 561 holding categorically that when there was no failure on the part of the assessee to disclose fully and truly all the material facts, reopening of the assessment under section 147 of the Act could not be resorted to beyond a period of four years from the end of the relevant assessment year. Thereafter, he pointed out that this proposition squarely applied in the facts of the present case as under:

i. That initially assessment was framed u/s 143(3) of the Act vide order dated 24-01-2013 and 30-01-2015 for A.Y 2011-12 and 2012-13 respectively. Reopening in both the case was beyond four years, notice u/s 148 being issued on 23.4.2016 and 26.8.2017 respectively, clearly beyond four years from the end of the relevant assessment years, which ended on 31.3.2016 for Asst.Year 2011-12 and 31.3.2017 for Asst.Year 2012-13.

ii. The reasons recorded by the AO in both the case was identically worded and was based on all information disclosed by the assessee in its financial statements which were part of the assessment records itself, and there was no finding by the AO of any material facts not being truly and fully disclosed by the assessee. In this regard he drew our attention to the reasons recorded for Asst.Year 2011-12 placed before at PB Page No.76 & 77 as under:

6. Our attention was also drawn to the reasons recorded to the Asst.Year 2012-13 placed before us at PB Page No.68 pointing out that it was on identical issue and for identical reasons. Referring to the reasons so recorded, the ld.counsel for the assessee first pointed out that as per the AO, reasons for reopening the case was based on information that the assessee had incorrectly claimed certain expenses as revenue expenditure, which should have been treated as capital expenditure. Referring to the reasons recorded, he pointed out that the AO had noted that the assessee being a State Government Corporation engaged in building infrastructure projects including roads, had been receiving grants from the Government for meeting its expenditure, and these grants were being treated as liability in its books of accounts, and all expenditure incurred there from were being adjusted against such liabilities; that the AO also noted that as per the direction of the Government of Gujarat, certain grants had been returned to the Governments, as a result of which there was a shortfall of grants for meeting the expenditure, and this expenditure which could not be made out of the grants was claimed by the assessee as revenue expenditure in its profit & loss account. He pointed out that the AO further noted in his reasons that since the assessee has credited its grant in its capital account, the expenditure also ought to have been capitalized and claim of the assessee, therefore, of the same as revenue expenditure had resulted in escapement of income to this extent.

7. The ld.counsel for the assessee pointed out that all the above information and facts as noted by the AO above, leading to his belief of escapement of income on accountof claim of revenue expenditure incurred in excess of grant given by the Government was gathered by the AO from the financial statement of the assessee itself, which fact is clearly evident from the reasons. He pointed out that none of the facts noted from the financial statement of the assessee by the AO has been found to be false or incorrect. Therefore, the assessee clearly could not have said to have not disclosed fully and truly all material facts relating to the claim of expenditure in its P&L account. He pointed out that therewasno such recording by the AO also in his reasons.

8. Based on the above two facts, he contended that basic requirementfor assuming jurisdiction to frame assessment under section 147 of the Act in the present case was clearly not fulfilled, and therefore, the assessment order framed was without jurisdiction and needed to be set aside.

9. The ld.DR on the other hand, relied on the finding of the ld.CIT(A) at para-5 of his order for Asst.Year 2011-12 as under:

“5. So far the other grounds of appeal in relation to re-opening of the assessment are concerned, I have perused the assessment order, the order disposing off the objections raised by the appellant. After considering the decision of Hon’ble Supreme Court in the case of GKN Driveshafts Ltd. which prescribed the procedure to deal with the initial objections raised against issuance of notice u/s 148 of the Act, it is held that the A.O. has observed all the due procedures as prescribed under the Income-tax Act and has examined the issue which was not originally examined by the A.O. in the original assessment order and he did not form any opinion on this identical issue which can be termed to be changed. Therefore, all the grounds raised against re-opening of the assessment are dismissed.”

10. We have heard parties and gone through the documents referred to before us, and also gone through the relevant provision of law, as also the case law relied upon before us. We find merit in the contention of the ld.counsel for the assessee that jurisdiction assumed in the present case both for Asst.Year 2011-12 and 2012­13 for reopening the case of the assessee under section 147 of the Act was not in accordance with law. The provision of law governing reopening of the case beyond four years, as pointed out by the ld.counsel for the assessee, requiring material facts necessary for assessment not being fully and truly disclosed by the assessee, is not disputed. Also not disputed is the fact that in both the appeals before us reopening was resorted to beyond 4 years Further, as rightly pointed out by the ld.counsel for the assessee, there is no charge by the AO in his reasons recorded of any material facts pertaining to the assessment of income of the assessee not being fully and truly disclosed by the assessee. As is evident from the bare perusal of the reasons recorded by the AO, and as has been rightly pointed out by the ld.counsel for the assessee, the reopening was resorted to for the reason that expenditure claimed by the assessee, and in its P&L account/revenue expenses claimed, ought to have been treated as capital. The reasons reveal that the AO formed this belief on the basis ofthe facts disclosed by the assessee in its financial statements. He noted that the assessee being Government body and in the business of construction of infrastructure facilities like road etc. was being given government grants for meeting expenses, and these grants were treated by the assessee as its liability. All expenditure incurred by the assessee were adjusted against this liability. All these facts have been noted by the AO from the records placed before him. Further, the AO hasnoted that during the impugned year certain government grants were refunded to the Government, and accordingly, there was a shortfall in meeting expenditure of the assessee. This shortfall, since could not be set off against the grants, was debited to the P&L account of the assessee. All these facts undeniably and as is evident from the reasons, have again been derived from the records of the assessee only. Therefore, as far as the claim of expenditure as revenue expenditure is concerned, there is no case of the AO that no material facts relating to the same has not been duly or truly disclosed. Asper the AO himself, the assessee has completely disclosed the fact of the receipt of Government grants, and also manner of treating of the same in its books of accounts as liability. The assessee has also disclosed manner of adjustment of expenditure against these government grants. The assessee has also disclosed the fact of refund of government grants and further also the fact of expenditure incurred in the current year itself of the government grants received being debited to its P&L account. All the above facts have been completely disclosed by the assessee and is the case of the AO also as per his reasons. Only reason for formation belief of escapement of income is that since as per the AO, the assessee treated its grants as capital, the expenditure incurred also ought to have been capitalised, which means that it is only with regard to the treatment of a transaction whether revenue or capital that the AO has formed a belief of escapement of income. This cannot be said to relate to non disclosure of any material facts by the assessee. The material fact in this case is the incurrence of expenditure, which the assessee has clearly disclosed. The assessee has also clearly disclosed all facts relating to the government grants received and also its treatment. Moreover, as rightly pointed out by the ld.counsel for the assessee, it is not even the case of the AO that the assessee had failed to disclose truly and fully all material facts relating to incurrence of expenditure, claimed as revenue by the assessee.

11. In view of the above, it is clear that prerequisite laid down in law for reopening of the case beyond four years is not found to be fulfilled in the present case. The reopening by the AO therefore, we hold, in both the cases is without jurisdiction; the assessment orders, therefore, passed as a consequence are invalid and directed to be set aside.

12. In the result, both the cross-objections are allowed.

13. Since we have set aside the assessment order as invalid, the appeals of the Revenue relating to the merits of the additions, being academic in nature, are dismissed as above.

14. In the result, appeals of the Revenue are dismissed and Cross-objections of the assessee are allowed in above terms.

Order pronounced in the Court on 19th April, 2023 at Ahmedabad.