Reopening by Reappraisal of Material Available on record During Original Assessment Proceedings is invalid

Advocate Akhilesh Kumar Sah

Re–Appreciation / Reappraisal Of The Material Available On Record During The Original Assessment Proceedings: Reopening Of Assessment By Forming Of Opinion That Income Has Escaped Assessment By AO, Not Allowable:

Mahindra Lifespace Developers Appeals

Very recently in Mahindra Lifespace Developers Ltd. vs. ACIT [ITA no.1167/Mum/2013 A.Y.2007-08 and ITA no.1171/Mum/2013 A.Y. 2006-07, decided on 31.05.2018], appeals by the assessee were against orders dated 27.11.2012, passed by the CIT(A) for the A.Y.s 2006–07 and 2007–08.

The first common ground in both the appeals related to the validity of re–opening of assessment under section 147 of the Income Tax Act, 1961 (for short “the Act”).

Facts relating to above issue which were more or less common in both the appeals were in brief, the assessee being a company was engaged in the business of real estate development and allied activities. For the A.Y. 2006–07, the assessee filed its return of income on 29.11.2006, declaring nil income under the normal provisions after set–off of losses. The assessee also declared book profit of Rs. 17,16,89,516 under section 115JB of the Act. Similarly, for the A.Y. 2007–08, the assessee filed its return of income on 15.11.2007, declaring nil income under the normal provisions after set–off of losses and book profit of Rs. 15,30,44,724 under section 115JB of the Act. The assessments for the aforesaid assessment years were originally completed under section 143(3) of the Act vide order dated 26.12.2008 and 03.12.2009, respectively. Subsequently, the Assessing Officer(AO) having reason to believe that the assessee was not eligible to avail deduction under section 80IAB of the Act re–opened the assessment for both the assessment years under section 147 of the Act. For that purpose the AO issued a notice under section 148 of the Act for the A.Y. 2006–07 on 15.01.2010 and for the A.Y.2007–08 on 24.01.2011. During the re–assessment proceedings, the AO noted that sanction for establishment of Special Economic Zone (SEZ) at Chennai, Tamil Nadu, was accorded to Mahindra Industrial Park Ltd. by the Ministry of Commerce and Industry, Government of India, on 08.09.2004. He observed, vide letter dated 19.04.2006 permission was granted to the assessee as a co–developer. Referring to the provisions of section 80IAB of the Act the AO observed that deduction under the said provision is allowable to a SEZ notified on/or after 01.04.2005.Whereas, in case of assessee, the SEZ was established prior to 01.04.2005. Thus, he was of the view that assessee’s claim of deduction under section 80IAB of the Act is not allowable. Accordingly, he called upon the assessee to justify its claim. In response, it was submitted, since permission to the assessee in the status of co–developer was granted on 19.04.2006, it is eligible to avail deduction under section 80IAB of the Act. The AO, however, did not accept the claim of the assessee and held that, since, the SEZ was notified / established prior to 01.04.2005, assessee was not eligible to claim deduction under section 80IAB of the Act. Accordingly, he disallowed the deduction claimed under section 80IAB of the Act in both the assessment years. The assessee challenged the disallowance of deduction claimed under section 80IAB of the Act for both the assessment years by preferring appeals before the first appellate authority both on the validity of re–opening of assessment under section 147 of the Act as well as on the merits of the disallowance made under section 80IAB of the Act.

As regards validity of re–opening of assessment, the CIT(A) after considering the submissions of the assessee in the context of facts and material on record, upheld the exercise of power under section 147 of the Act by holding that there is no change of opinion while re–opening the assessment. He observed, assessee’s claim of deduction under section 80IAB of the Act was allowed in the original assessment without examining the issue whether the claim of deduction is allowable or not. Therefore, no opinion with regard to the issue on which assessment was reopened was formed in original assessment. He observed, while re–opening the assessment, the AO has recorded reason to believe that income chargeable to tax has escaped assessment year. Therefore, the re–opening of assessment after such recording of reason cannot be held to be invalid.

The AR submitted, during the original assessment proceedings the AO has examined the issue relating to assessee’s claim of deduction under section 80IAB of the Act, hence, formed an opinion which cannot be reviewed in the proceedings under section 147 of the Act. He submitted, though, the re–opening of assessment was before expiry of four years from the relevant assessment years, however, it cannot be allowed on a mere change of opinion in the absence of any tangible material. The AR submitted that during the original assessment proceedings, the assessee had furnished audit report in form no.10CCB in support of its claim of deduction under section 80IAB of the Act which was verified by the AO. Drawing attention to the copy of reasons recorded which was placed in the paper book the AR submitted in the reasons recorded, nowhere the AO has referred to any fresh tangible material coming to his possession after completion of original assessment. That being the case, re–opening of assessment on a mere change of opinion is invalid. In support of his contention, AR relied upon the following decisions:–

The DR strongly supporting the finding of the CIT(A) submitted in the original assessment proceedings, the AO has not at all enquired into or examined assessee’s claim of deduction under section 80IAB of the Act. He submitted, the basic issue of fulfillment of condition of section 80IAB of the Act was never examined by the AO before allowing assessee’s claim of deduction. He submitted, as per the condition imposed under section 80IAB of the Act the minimum requirement which is to be fulfilled is, the SEZ must be notified / established in pursuance on or after 01.04.2005 under the Special Economic Zones Act, 2005, which came into force w.e.f. 23.06.2005. He submitted, whereas, in assessee’s case the approval / sanction for establishment of SEZ was granted by the Ministry of Commerce on 08.09.2004, which is prior to 01.04.2005. He submitted, the subsequent approval granted to the assessee as co–developer in the year 2006 cannot be equated to the initial sanction / approval for establishment of SEZ. Thus, he submitted, in the original assessment proceedings, the AO having not examined and applied his mind to the issue, it cannot be said that any opinion was formed with regard to assessee’s claim under section 80IAB of the Act so that the re–opening of assessment will amount to be on a change of opinion. DR submitted, on the basis of material on record if the AO was prima–facie of the belief that income has escaped assessment, he could have proceeded to re–open the assessment after recording reasons. He submitted, sufficiency of reason to believe cannot be challenged as the assessee gets an opportunity during the re–assessment proceedings to argue its case that there is no escapement of income. Thus, he submitted, the contention of the assessee that re–opening of assessment was invalid should not be accepted. In support of his submission DR relied upon the decision of the Hon’ble Jurisdictional High Court in Eleganza Jewellery Ltd. vs. CIT, 52taxmann.com 46.

The learned Members of the ITAT, Mumbai considered rival submissions and perused materials on record. The learned Members observed that it is relevant to observe that the assessee has claimed deduction under section 80IAB of the Act in the return of income filed for both the assessment years. In fact, in support of the deduction claimed under section 80IAB of the Act the assessee has furnished audit reports in form no.10CCB before the AO. Undisputedly, the return of income filed by the assessee for both the assessment years under appeal were selected for scrutiny and in course of the assessment proceedings, as it appears from material on record, the AO specifically enquired into assessee’s claim of deduction under section 80IAB of the Act. This fact, as far as A.Y. 2006–07 is concerned, is evident from the letter dated 10.12.2008, filed by the assessee before the AO in course of original assessment proceedings. A perusal of the said letter reveals that the assessee has specifically responded to AO’s query regarding claim of deduction under section 80IAB of the Act. Similarly, in assessment year 2007–08 in response to similar query raised by the AO the assessee vide letter dated 17th June 2009, has submitted its reply.

It is pertinent to observe, DR in course of hearing drew our attention to letter no. DCIT–7(2)(1)/ITAT/Mahindra Lifespace/2017–18 dated 27.12.2017, of the DCIT, Circle–7(2)(1), Mumbai, who happens to be the AO of the assessee. On a perusal of the said letter, a copy of which was filed before us, it is evident that the assessment record for assessment year 2006–07 was not traceable and after perusing the assessment record for A.Y. 2007–08, the AO has observed that vide order sheet noting dated 23.10.2009, the AO asked the assessee to furnish the complete details regarding deduction claimed under section 80IAB of the Act. He has also stated that in response to the said query the assessee vide submissions dated 04.11.2009, has furnished the details. Of course, the AO has commented that further observation / noting of the AO with regard to the submissions made by the assessee is not there. Though, he has also observed that the assessee has filed voluminous details running into more than 100 pages.

Further, it was stated by him that he was not sure whether the issue of claim of deduction under section 80IAB of the Act was examined by the AO during the original assessment proceedings or not. Thus, the facts which clearly emerge from the material on record are, the AO in course of original assessment proceedings did enquire into assessee’s claim of deduction under section 80IAB of the Act in both the assessment years. Merely because there is no discussion in the body of the assessment order with regard to acceptability of assessee’s claim of deduction under section 80IAB of the Act, it cannot be said that the AO has not enquired into and applied his mind to the material on record before allowing assessee’s claim of deduction under section 80IABof the Act.

In other words, it cannot be said that the AO has not formed any opinion with regard to assessee’s claim of deduction under section 80IAB of the Act. On the contrary, the material on record indicates that during the original assessment proceedings the AO did enquire into assessee’s claim of deduction under section 80IAB of the Act. It has to be accepted that the AO after due application of mind to the material on record being satisfied that the claim of deduction under section 80IAB of the Act is allowable has not found it necessary to discuss the issue in the assessment order.

However, that does not mean that the AO while completing the original assessment has not formed any opinion on the issue. As could be seen from the reasons recorded, on the basis of approval granted by the Ministry of Commerce, Government of India, to Mahindra Industrial Park Ltd. dated 8th September 2004, the AO has re–opened the assessment under section 147 of the Act. The reasons recorded further reveal that the aforesaid fact came to the notice of the AO on perusal of the records. Thus, it is evident from the reasons recorded that there was no fresh tangible material available before the AO at the time of re–opening of assessment. Rather, on re–appreciation / reappraisal of the material available on record during the original assessment proceedings the AO has formed an opinion that income has escaped assessment. The Department was unable to demonstrate that the aforesaid letter of approval by the Ministry of Commerce was not looked into or considered by the AO during the original assessment proceedings. That being the case, the re–opening of assessment, prima–facie, appears to be on a mere change of opinion in the absence of tangible material.

As regards the decision of the Hon’ble Jurisdictional High Court referred to by the DR, on a perusal of the said decision it is evident that the Hon’ble Jurisdictional High Court has clearly held that the issue on which the re–opening of assessment was made if were not considered by the AO which is evident from the fact that during the assessment proceedings no query was raised with regard to those issues by the AO, then it cannot be said that any opinion with regard to those issues were formed by the AO during the original assessment proceedings. However, facts are different in the appeals before us. Materials on record clearly indicate that during the original assessment proceedings the AO did raise queries with regard to the assessee’s claim of deduction under section 80IAB of the Act.

Thus, in view of the aforesaid difference in facts, the ratio laid down in the decision relied upon by the DR will not apply to the facts of the present case. On the contrary, the ratio laid down in the decisions relied upon by the AR squarely apply to the facts of the present case. In view of the above, we hold that the re–opening of assessment under section 147 of the Act in both the assessment years under appeal having been made on a mere change of opinion in the absence of tangible material is legally invalid. Consequently, the learned Members of ITAT held that assessment orders passed in pursuance thereto have to be declared as invalid and liable to be quashed.