Case Law Details
DCIT Vs M.D. Garments Pvt. Ltd. (ITAT Kolkata)
Assessment was reopened by AO merely on the basis of information received and there was no independent application of mind as AO failed to point out failure of assessee to furnish truly and fully all material facts. Therefore, reopening was not justified.
FULL TEXT OF THE ITAT JUDGMENT
This appeal is preferred by the revenue against the order of Ld. CIT (A) – 20, Kolkata dated 18.07.2017 and the same is being disposed of along with the cross-objection filed by the assessee being C.O. No. 38/Kol/2018.
2. The assessee in the present case is a company which is engaged in the business of dealing in readymade garments and fabric. The return of income for the year under consideration was filed by it on 27.09.2009 declaring a total income of Rs. 6,26,220/-. The said return was originally processed by the AO under section 143(1) of the Act. Subsequently he found that the share capital and share premium amounting to Rs. 40,00,000/- received by the assessee through Kolkata based jamakharchi/shell/paper companies was nothing but unaccounted income of the assessee which was brought back in the business in the guise of share capital. He accordingly reopened the assessment and issued a notice under section 148 after recording the reasons. In response to the said notice, the return of income was filed by the assessee on 26.04.2016. The assessee also obtained a copy of reasons recorded by the AO for reopening the assessment and raised its objection by filing a petition on 27.05.2016. The Assessing Officer did not find merit in the said objections and overruling the same by a speaking order passed on 04.07.2016, he proceeded to complete the assessment under section 143(3)/147. In the assessment so completed vide an order dated 20.09.2016, the total income of the assessee was determined by the AO of Rs. 47,06,220/- after making the addition of Rs. 40,00,000/- under section 68 by treating the share capital and share premium amounts as unexplained cash credit and made an addition of Rs. 80,000/- under section 69C on account of unexplained expenditure incurred on payment of commission for obtaining the accommodation entry.
3. Against the order passed by the AO under section 143(3)/147, an appeal was preferred by the assessee before the Ld. CIT(A) challenging the validity of the said assessment on various grounds and also disputing additions made by the AO therein under section 68 and 69C. In support of its case on the preliminary issue relating to validity of assessment under section 143(3)/147, a detailed written submission was filed by the assessee before the Ld. CIT(A) placing reliance on various judicial pronouncements. After reproducing the said written submission on page no 3 to 15 of his impugned order, the Ld. CIT(A) proceeded to decide the preliminary issue raised by the assessee challenging the validity of the assessment made by the AO under section 143 (3)/147 by recording his findings and observations as under:
I have considered findings given by the AO in the assessment order and the -written submission as well as different case laws brought on record on this issue by the AR in the appellate proceedings. From the proviso below the section 147 it is clear that certain conditions are necessarily required to be fulfilled before any action is taken u/s 147 in case 4 years from the end of the relevant assessment year has elapsed. These conditions are
1) That, there is a failure on the part of the assessee of failing to file a return of income u/s 139.
2) That, there is a failure on the part of the assessee in responding to a notice issued under sub-section (1) of section L42 or section 148.
3) That, there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment Year.
Now the factual position of this case is that
1) The assessee filed its return of income on 2 7-09-2009 (thus, it shows that there is no failure on the part of the assessee to file return of income for AY 2009-l0 in time).
2) From the original assessment order in this case for AY 2009-10 which was passed/processed under section 143(1), it is clear that no further notice for scrutiny assessment was issued to the assessee by the Assessing
3) It is clear that the assessee had clearly disclosed its share capital/share All necessary information required in ITR -6 was given by the assessee to the department.
Here in this case, the processing was completed under section 143(1) of the Income Tax Act, 1961. The AR has brought on record the case law of Orient Craft Ltd(supra) & Tupperware India (P) Ltd (supra)
The Hon’ble High Court, Delhi in the case of Commissioner of lncome Tax-V v. Orient Craft Ltd [2013] 354 ITR 536 (Del) has held that
The assessee’s contention that even an assessment made under section 143(1) of the Act can be reopened under section 147 if the Assessing Officer has ‘reason to believe’ that income chargeable to tax has escaped assessment, is sound. It is true that no assessment order is passed when the return is merely processed under section 143(1) and an intimation to that effect is sent to the assessee. However, it has been recognized by the Supreme Court itself in Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd [2007] 291 ITR 500/161 Taxman 316 (SC), that even where proceedings under section 147 are sought to be taken with reference to an intimation framed earlier under section 143(l), the ingredients of section 147 have to be fulfilled; the ingredient is that there should exist ‘reason to believe’ that income chargeable to lax has escaped assessment. This judgment, does not give a carte blanche to the Assessing Officer to disturb the finality of the intimation under section 143(l) at his whims and caprice; he must have reason to believe within the meaning of the section. [Para 8]
The Hon’ble High Court, Delhi in the case of Pr. Commissioner of Income Tax v. Tupperware India (P) Ltd [2016] 236 Taxman 494 has held that
“The Court examined the meaning given to the words ‘reasons to believe’, and held that the assumption of the revenue that somehow the words ‘reason to believe’ have to be understood in a liberal manner where the finality of an intimation under section 143(l) is sought to be disturbed, is erroneous and misconceived. It was held that there is no warrant for such an assumption because of the language employed in section 147; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(l). Therefore, it is not permissible to adopt different standards while interpreting the words ‘reason to believe’ vis-a-vis section 113(l) ad section 113(3). The court further comprehensively rejected the argument of the revenue, which it seeks to urge in the present case as well, that an ‘intimation’ under section 143(1) cannot be equated to an assessment. The court held that ‘if an ‘intimation’ is not an ‘assessment’, then it can never be subjected to section 147 proceedings, for that section covers only an ‘assessment’. The court held that the expression ‘reason to believe’ cannot have two different standards or sets or meaning, one applicable where the assessment was earlier made under section 143(3) and another applicable where an intimation was earlier issued under section 143(1). [Para 17]”
Now the question is in case there is no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year, in that case can the assessment be reopened u/s 147 or for that matter is the reopening of the assessment u/s 147 is valid.
During the appellate proceedings the AR has brought on record many case laws on this issue. The Hon ‘ble Bombay High Court in the case sound Casting Pvt. Ltd vs DCIT 2012 (250) CTR 119 has held that validity of reopening of assessment framed after scrutiny beyond a period of four years from the end of the relevant AY – AO purported to reopen assessment on ground that melting loss of 7.75% claimed by assessee is higher than what is found in a similar line of business – AY 2005-06 – Held that – No allegation has been made that that there was any failure on part of assessee to fully and truly disclose material facts necessary for assessment for that AY. This ex facie would amount merely to a change of opinion. Therefore, notice issued u/s 148 and impugned order of assessment is set aside.
I have also considered the ratio decided by the Hon ‘ble Delhi High Court in the case of Haryana Acrylic Manufacturing Co. supra. In the said case also, there was no mention in the reasons recorded that there was failure on the part of the assessee to disclose fully and truly all material facts but, in the counter-affidavit filed before Hon’ble Delhi High Court, such assertion was made. Hon’ble Delhi High Court did not accept the Revenue’s contention and held that the notice issued u/s 148 based on the reasons recorded supplied to the petitioner cannot be sustained. The finding of their Lordships reads as under:-
“Held, allowing the petition, (i) that the reasons recorded did not indicate the failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the assessment year 1998- 99. While in the reasons supplied to the petitioner there was no mention of the allegation that there was a failure on the part of the assessee to disclose fully and truly all material facts, in the reasons shown in the said form to be counter-affidavit there was a specific allegation that there was a failure on the part of the assessee to disclose fully and truly all material facts relating to accommodation entries raised from one of the companies to the extent of Rs.5 lakhs. Thus, one of the conditions precedent for removing the bar against taking action after the said four year period remained unfulfilled. Consequently, the notice under section 148 based on the recorded reasons supplied to the petitioner as well as the consequent order were without jurisdiction as no action under section 147 could be taken beyond the four year period.”
That the ratio of the above decision of Hon’ble Delhi High Court would be squarely applicable to the facts under appeal before us. Similar view is reiterated by their lordships of Hon’ble Delhi High Court in the case of Son itpur Solvex Ltd (supra), wherein it was held as under:-
“Held, dismissing the appeal, that the assessee had disclosed, very clearly and thoroughly, that its transport subsidy reserve was, as on March 31, 1996, Rs.3500330/- and that by March 31, 1997, this amount had risen to Rs.5970889/-. The Revenue could not say that the assessee did not disclose all such material facts, which were necessary for making a valid and effective assessment of income for the purpose of realization of tax. The reason assigned by the Assessing Officer showed that the information regarding transport subsidy was available in the audited accounts and statements furnished by the assessee to the Assessing Officer along with the assessee ‘s return. These details being available before the Assessing Officer, the Assessing Officer could not say that there was omission or failure on the part of the assessee to make the 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 its assessment, for that assessment year”.
Respectfully following the above two decisions of Hon’ble Delhi High Court, we hold that the reopening of assessment beyond the period of four years from the end of the relevant assessment year was not justified because (i) there was no failure on the part of the assessee to disclose fully and truly all material facts and (ii) there was no whisper in the reasons recorded that there was any failure on the part of the assessee to disclose all material facts.
In view of the above, respectfully following the above two decisions of Hon’ble Delhi High Court, we quash the notice issued u/s 148 of the Act. Since the notice issued u/s 148 is quashed, the assessment order passed in pursuance to such notice is also quashed. Once the assessment order itself has been quashed, the other grounds raised by the assessee in its appeal do not require any adjudication on merits”.
The AR has further brought on record the ratio decided by the Jurisdictional Kolkata bench of ITAT in the case of DCIT, Circle-43, Kolkata vs M/s Jaytee Exports Kolkata in ITA Nos.35 & 36/Kol/2011 dt.03-05-2013 In this case the assessee challenged the reopening of assessment before the Ld CIT(A) as bad in law on the ground that the assessment year in question was A.Y 2003-04 and the notice u/s 148 was issued on 07-05-2008 which was beyond the four years of the relevant assessment and as there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.
The Ld CIT(A) held the reopening of assessment to be bad in law on the ground that the original assessment was completed u/s 143(3) after due process of scrutiny and assessee’s claim u/s 80IB of the Act was duly allowed while completing such assessment.
Against the order of the CIT(A) the revenue filed an appeal before the ITAT which confirmed the order of the CIT(A) and dismissed the appeal filed by the Revenue. The AR has also brought on record the case law of WEL
Intertrade (P) Ltd & Anr. Vs ITO in Writ Petn. No.7722 of 2007 (Del) in this case the Hon ‘ble Delhi High Court held as under:
“A plain reading of the said proviso makes it more than clear that where the provisions of section t47 are being invoked after the period of four years from the end of the relevant assessment year, in addition to the Assessing Officer having reason to believe that any income chargeable to tax has escaped assessment, it must also be established as a fact that such escapement of assessment has been occasioned by either the assessee failing to make a return under section 139, etc., or by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year. In the present case, the question of making of a return is not in issue and the only question is with regard to the second portion of the proviso, which relates to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In so far as this precondition is concerned, there is not a whisper of it in the reasons recorded by the Assessing Officer. In fact, as indicated above, the Assessing Officer could not have made this a ground because the Assessing Officer had required the petitioner to furnish details with regard to loss occasioned by foreign exchange fluctuation which the petitioner did by virtue of the reply dt, 05-02-2002. Since the petitioner had fully and truly disclosed all the material facts necessary for the assessment, the precondition for invoking proviso to section 147 of the said Act had not been satisfied”.
I have considered the ratio decided by the Hon ‘ble Delhi High Court in the case of Pr.CIT-4, Delhi vs G & G Pharma India Ltd in ITA No.545/2015 dt.08-10-2015 in which the Hon’ble Delhi High Court has considered the ratio decided by the Honble Supreme Court in the case of Phool Chand Bajrang Lal vs Income-tax Officer (1993) 203 ITR 456 SC.
In this case the main thrust of the submission of Mr Sawhney is that as was in the case of India Terminal Connector System (supra), in the present case as well, there was specific information regarding the name of the entry provider, the date on which the entry was taken, the cheque details as well as the amount credited to the account of the assessee. He accordingly submitted that this by itself constituted sufficient material for the AO to form an opinion that the assessee company has introduced his own unaccounted money in its bank account by way of accommodation entries.
Mr Kapil Goel, learned counsel for the assessee, placed reliance on other decisions of this Court including CIT vs Pradeep Kumar Gupta (2008) 303 ITR 95; the decision dt.27-03-2015 in WP (C) No.5330 of 2014 (Krown Agro Foods Pvt. Ltd vs ACIT); the decision dt. 04-08-2015 in ITA No.486 of 2015 (CIT vs Shri Govind Kripa Builders Pvt. Ltd) and the decision dt.24- 08-2015 in ITA No.226 of 2015 (CIT vs Ashian Needles Pvt. Ltd.).
The court at the outset proposes to recapitulate the jurisdictional requirement for reopening of the assessment under section 147/148 of the Act by referring to two decisions of the Supreme Court. In Chhugamal Rajpal vs SP Chaliha (1971) 79 ITR 603, the Supreme Court was dealing with a case where the AO had received certain communications from the Commissioner of Income Tax showing that the alleged creditors of the assessee were name-lenders and the transactions are bogus. The AO came to the conclusion that there were reasons to believe that income of the assessee had escaped assessment. The Supreme Court disagreed and observed that the AO had not even come to a prima facie conclusion that the transactions to which he referred were not genuine transactions. He appeared to have had only a vague felling that they may be bogus transactions. It was further explained by the Supreme Court that:
“Before issuing a notice under section 148, the ITO must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under section 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the ITO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or clause (b) of section 147 are satisfied, the ITO has no jurisdiction to issue a notice under section 148”.
The Supreme Court concluded that it was not satisfied that the ITO had any material before him which could satisfy the requirements under section 147 and therefore could not have issued notice under section 148.
During the appellate proceedings the AR has also brought on record case law decided by the Jurisdictional Kolkata bench of ITAT in the case of DCIT, Circle-6, Kolkata vs Great Wall Marketing Pvt. Ltd Kolkata in ITA No.660/Kol/2011 dated 03-02-2016. The ratio decided in this case is squarely applicable in this case. In its order The Hon’ble Kolkata bench of ITAT has held as under:
The submissions of the learned counsel for the assessee before us was that the reasons recorded by the AO were mere information received from D.I.T.(Investigation), New Delhi. There was no independent application of mind by the AO based on which it can be said that he arrived at the satisfaction that the income of the assessee is chargeable to tax has escaped assessment. It was submitted in ITA No.660/Kol/2011 Great Wall Marketing (P) Ltd., in which initiation of proceedings u/s 148 was quashed. In this order, it was further held that in A.Yr.2002-03 information received by the AO was vague and uncertain and cannot be construed to be sufficient and relevant material on the basis of which reasonable person can form belief regarding escapement of income.
Reliance was placed by the learned counsel for the assessee on the decision of the Hon ‘ble Delhi High Court in the case of CIT vs Insceticides (India) Ltd 357 ITR 330 and CIT vs SFIL Stock Broking Ltd. 325 ITR 285 (Delhi). In both the aforesaid decisions the reasons recorded by the AO for initiating proceedings u/s 148 of the Act the Hon’ble Delhi High Court upheld the order of the Tribunal quashing the proceedings. Reliance was also placed on the decision of ITAT, Kolkata ‘C’ Bench in the case of M/s. Controlla Electrotech (P) Ltd vs. DCIT in ITA Nos.1443 & 1444/Kol/2014 wherein on identical facts the Tribunal was pleased to quash the reassessment proceedings. On merits the learned counsel for the assessee relied on the order of CIT(A).
The Tribunal has further held as under:
“We have given a careful consideration of the submissions made by the learned counsel for the assessee. It is clear from the reasons recorded by the AO that the AO acted only on the basis of a letter received from Investigation Wing, New Delhi. The reasons recorded does not give as to who has given the bogus entries to the assessee. The reasons recorded also does not mention as to on which dates and through which mode the bogus entries were made by the assessee. The reasons recorded which are extracted in the earlier part of the order does not show, what was the information given by DIT(Inv.),New Delhi. The date of the information received by the AO were not spelt out in the reasons recorded. The involvement of the assessee is also not spelt out, except mentioning the corporate bodies who had subscribed to the share capital of the assessee were non-existent and not creditworthy. On identical facts the Hon’ble Delhi High Court in the case of CIT vs Insecticides (India) Ltd (supra) has taken a view that the reasons recorded were vague and uncertain and cannot be construed as satisfaction on the basis of the relevant material on the basis of which a reasonable person can form a belief that income has escaped assessment. The Hon ‘ble Delhi High Court has also come to the conclusion that the reasons recorded did not disclose the AO’s mind regarding escapement of income. The Hon ‘ble Delhi High Court ultimately held that initiation of proceedings u/s 148 of the Act was not valid and ITA No.660/Kol/2011 Great Wall Marketing (P)Ltd. was quashed.
The facts and circumstances in the present case are identical to the case decided by the Hon ‘ble Delhi High Court. Following the said decision we hold that initiation of re-assessment proceedings is not valid. On this ground, the assessment is liable to be annulled.”
I have considered the notice of the A.O given/issued u/s 148 to the assessee. I have also considered reasons recorded by the A.O for issuance of the notice. I think this case is squarely covered by the ratio decided by the Jurisdictional Bench of ITAT in the case of DCIT, Circle-43 vs. Jaytee Exports (supra) and the ratio decided by the Jurisdictional Bench of ITAT in the case of Great Wall Marketing Pvt. Ltd. (supra) and the ratio decided by the Hon’ble Supreme Court in the case of Chhugamal Rajpal (supra) and Dharia Constructions Company (supra). Accordingly, respectfully following the ratio decided in above mentioned/discussed cases, assessee’s appeal on Ground No.1 and 10 are allowed.
4. Keeping in view his decision rendered on the preliminary issue cancelling the assessment made by the AO under section 143(3)/147, the Ld. CIT(A) did not adjudicate upon the other grounds raised by the assessee challenging both the additions made by the AO under section 68 and 69C on merit.
5. Aggrieved by the order of the Ld. CIT(A), the revenue has preferred this appeal before the Tribunal on the following grounds:
“1. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law in allowing the technical grounds of appeal, Ground No. 1 and 8 discussing wrong facts and law.
2. That on the facts and circumstances of the case, the Ld. CIT(A) erred in law by allowing the technical grounds taken by the assessee holding the reasons recorded by the AO as void ab initio and is liable to be quashed and hence, the assessment order passed, is bad in law mainly discussing and relying on those case laws in which it was held that reopening of assessment was bad in law on the grounds that reopening was done beyond the four years after passing of order u/s 143(3) and there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment but the Ld. CIT(A) failed to examine the facts of this case in which original assessment was done u/s 143(1)(a) and no u/s 143(3) and hence first proviso to section 147 did not apply in the instant case.
3. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in not considering the facts of the case that original assessment in this case was completed u/s 143(1)(a) and hence, requirement of first proviso to section 147 of recording of failure on the part of the assessee to disclose fully and truly all materials facts necessary for assessment was not required.
4. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in allowing the appeal of the assessee only on technical grounds without examining the case on merit of addition, without examining the facts of the case and without applying the correct law on the facts of the case and hence order of CIT(A) deserves to be set aside.”
6. I have heard the arguments of both the sides and also perused the relevant material available on record. In the ground specifically raised in this appeal, the revenue has challenged the impugned order of the Ld. CIT(A) holding the reopening of assessment by the AO after the expiry of a period of 4 years from the end of the relevant assessment year without pointing out that there was escapement of income as a result of the failure of the assessee to furnish truly and fully of necessary facts for the purpose of assessment as barred by limitation as per the first proviso to section 147. In this regard, the learned DR has contended that the said proviso is applicable only in the case where assessment was originally completed under section 143(3) and since the return of income filed by the assessee in the present case was processed by the AO under section 143(1) without there being any assessment under section 143(3), the first proviso to section 147 is not applicable in the present case. He has contended that the Ld. CIT(A) thus is not justified in holding the reopening of assessment by the AO to be invalid by relying on the said proviso and this position which is very clearly evident from the record is not disputed even by the learned counsel for the assessee. He however has invited my attention to the relevant portion of the impugned order of the Ld. CIT(A) to point out that the reopening of assessment was held by the Ld. CIT(A) to be invalid even on other grounds and the revenue has not challenged the same specifically in the grounds raised in the present appeal. He has also invited my attention to the reasons recorded by the AO for reopening as given on page no 45 and 46 of the Paper Book to contend that the assessment was reopened by the AO merely on the basis of information received and there was no independent application of mind by the AO based on which it could be said that he had arrived at the satisfaction that the income of the assessee chargeable to tax had escaped assessment. He has contended that this argument was specifically raised by the assessee before the Ld. CIT(A) while challenging the validity of reopening by relying inter alia on the decision of Hon’ble Delhi High Court as well as the decision of Division Bench of this Tribunal and the same was accepted by the Ld. CIT(A) by passing the speaking order. He has contended that there is however no ground raised by the revenue in the present appeal disputing specifically the decision rendered by the Ld. CIT(A) on this issue holding the reopening of the assessment to be invalid. Although the learned DR has contended that ground no 1 raised by the revenue in this appeal covers this issue also, I find that the said ground is too general to cover this vital issue specifically. Moreover it appears that the relief has been given by the Ld. CIT(A) to the assessee on this issue by relying inter alia on the decision of the Delhi High Court as well as that of the Division Bench on this Tribunal as referred to and discussed in his impugned order and there is no material contention raised by the learned DR to challenge the same. I, therefore, uphold the impugned order of the Ld. CIT(A) deciding the preliminary issue relating to the validity of the assessment made by the AO under section 143(3)/147 in favour of the assessee and dismiss the appeal of the revenue. As a result of the decision rendered by me upholding the impugned order of the Ld. CIT(A) on the preliminary issue while disposing of the appeal of the revenue, the cross-objection filed by the assessee raising the issues relating to the additions made by the AO in the assessment under section 143(3)/147 on merit have become infructuous. The same is accordingly dismissed.
7. In the result, the appeal of the revenue as well as cross-objection of the assessee are dismissed.
Order Pronounced in the Open Court on 20th June, 2018.
