Case Law Details

Case Name : Biddle Sawyer Limited Vs. ACIT (ITAT Mumbai)
Appeal Number : ITA No. 5443/MUM/2015
Date of Judgement/Order : 22/11/2017
Related Assessment Year : 2006-07
Courts : All ITAT (5167) ITAT Mumbai (1632)

Biddle Sawyer Limited Vs. ACIT (ITAT Mumbai)

The point to be examined is as to whether all material facts were available to the Assessing Officer on the impugned issue or else, was there a failure on the part of the assessee to disclose. The stand of the Revenue is that there was a failure to make full and true disclosure of material facts as required by the proviso to Sec. 147 of the Act. No doubt, the proviso to Sec. 147 of the Act uses the words “material facts” and thus, it means that furnishing of ‘just the facts’ would not suffice, but rather the requirement is to furnish “material facts”. It can be safely understood that what is required in the present context is the relevant or concerned facts. In terms of the material referred to by the learned representative, and which was available to the Assessing Officer during the original assessment proceedings, it is quite clear that assessee disclosed the details of selling and distribution expenses and also the various elements of expenses debited therein, including that of advertisement giveaways and interview plans. Therefore, the Assessing Officer was quite aware of the expenditure and if that was known to him, what further facts were required to be disclosed so as to be construed as “material facts” ? The reasons recorded do not allude to such further “material facts”, which the Assessing Officer expected the assessee to disclose, and which were necessary for his assessment but not disclosed. Therefore, factually speaking, we find enough weight in the plea canvassed that there has been no failure on the part of the assessee to disclose the material facts as required by the proviso to Sec. 147 of the Act and thus, in our view, the initiation of proceedings by issuance of notice u/s 147/148 of the Act was vitiated.

Full Text of the ITAT Order is as follows:-

The captioned appeal by the assessee is directed against the order of CIT(A)-12, Mumbai dated 09.09.2015 pertaining to the Assessment Year 2006-07, which in turn has arisen from the order passed by the Assessing Officer, Mumbai dated 30.10.2013 u/s 143(3) r.w.s 147 of the Income Tax Act, 1961 (in short ‘the Act’).

2. In its appeal, assessee has raised the following Grounds of appeal:-

GROUND NO. 1

(a) On the facts and the circumstances of case and in law, the Commissioner of Income Tax (Appeals) -12 (“CIT(A)”) erred in confirming the order of the Assistant Commissioner of Income- tax – 6(1) (“the AO”) in reopening the assessment under section 143(3) r.w.s. 147 of the Income- tax Act, 1961 (”the Act”).

(b) The CIT(A) erred in not appreciating that there is no income which has escaped assessment for the year under appeal by reason of any failure on the part of the appellant to disclose fully and truly all material facts necessary for the assessment.

GROUND NO. 2

(a) On the facts and the circumstances of case and in law, the CIT(A) erred in upholding the action of the AO in disallowing the expenditure incurred on “advertisement giveaways” of Rs. 37,50,000 and “interview plans” of 3,63,000 on the ground that the expenditure was not incurred wholly and exclusively for the purpose of business of the appellant.

(b) The CIT(A) erred in relying on the CBDT’s Circular No. 5 of 2012 [F 225/142/2012-ITA 11] dated 01.08.2012 and holding that the expenditure incurred on providing cash, gift, travel facility, hospitality or similar freebies to medical practitioners and their professional associations is disallowed under section 37(1) of the Act.”

3. As the Grounds of appeal reveal, the first grievance of the assessee is against the validity of the assessment proceedings initiated by the Assessing Officer by issuance of a notice u/s 147/148 of the Act. In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacture of pharmaceutical products. For the assessment year under consideration, the return filed by the assessee originally was subject to a scrutiny assessment u/s 143(3) of the Act dated 22.12.2008 determining the income at Rs. 14,56,38,663/-. Subsequently, the Assessing Officer reopened the assessment by issuing a notice u/s 148 of the Act dated 26.03.2013 on the ground that certain income chargeable to tax had escaped assessment to the extent of Rs. 41,13,000/- comprising of certain expenses which had remained to be examined in the original assessment proceedings on account of selling and distribution expenses.

4. In the ensuing assessment, the Assessing Officer disallowed the expenditure of Rs. 41,13,000/-, thereby determining the revised income at Rs. 14,97,51,660/-.

5. Before us, the learned representative for the assessee has challenged the reopening of assessment on two issues, namely, that since the reopening was after a period of 4 years from the end of the relevant assessment year, thus, having regard to the first proviso to Sec. 147 of the Act, the reopening could be justified only in the absence of any failure on the part of the assessee to disclose the material facts necessary for the assessment. According to him, in the instant case, there was no failure on the part of the assessee to disclose all the material facts and, therefore, the reopening was not justified. Secondly, it is also pointed out that the reasons recorded by the Assessing Officer for reopening, a copy of which has been placed in the Paper Book at page 94, are not based on any tangible material and are rather based on material which was already available before the Assessing Officer in the course of original assessment proceedings and, therefore, the reopening was not tenable in law.

6. On the other hand, the ld. DR appearing for the Revenue has defended the initiation of proceedings u/s 147/148 of the Act by relying on the reasons recorded by the Assessing Officer as well as relying on the order of the CIT(A) on this issue. The ld. DR referred to the relevant discussion in the order of the CIT(A) in terms of which it is sought to be pointed out that the reasons recorded are based on tangible material and also the fact that during the assessment proceedings, assessee had not objected to the reopening and that such an objection was taken only before the CIT(A) for the first time.

7. We have carefully considered the rival submissions. Factually speaking, in the instant case, the original assessment was completed u/s 143(3) of the Act dated 22.12.2008. The reassessment has been initiated by issuing a notice u/s 148 of the Act dated 26.03.2013, which is after the expiry of 4 years from the end of the relevant assessment year and, therefore, the first proviso to Sec. 147 of the Act is triggered. In terms of the said proviso, it is prescribed that the reopening after the expiry of 4 years from the end of the financial year in a case where the original assessment has been completed u/s 143(3) of the Act shall be valid only if there was a failure on the part of the assessee to disclose fully and truly all the material facts necessary for its assessment. The aforesaid prescription has been a subject-matter of consideration by various courts, and in the context of the objection raised by the assessee, the judgment of the Hon’ble Bombay High Court in the case of Jashan Textile Mills (P) Ltd. vs DCIT, 284 ITR 542 (Bom) is specifically relevant. In the case of Jashan Textile Mills (P) Ltd. (supra), a notice u/s 148 of the Act was issued after the expiry of 4 years from the relevant assessment year and the proviso to Sec. 147 of the Act was found applicable. It was noted that the reasons for reopening were solely based on the material which was already on record before the Assessing Officer and, therefore, it was not the case of the Revenue that there was any failure on the part of the assessee to disclose fully and truly all the material facts. In such a circumstance, the reopening was found to be invalid. In the said judgment, the Hon’ble High Court had also observed that even the deeming aspect covered by Explanation – 2 to Sec. 147 of the Act could also not be invoked unless it is established that there was a failure on the part of the assessee to disclose fully and truly all the material facts. A similar proposition has also been upheld by the Hon’ble Bombay High Court in the case of Dena Bank vs. Union of India, [2016] 76 taxmann.com 279 (Bombay), which has also been relied upon by the assessee before us. To the similar effect are the judgments of the Hon’ble Bombay High Court in the case of Tata Business Support Services Ltd. vs. DCIT, (2015) 232 Taxman 702 (Bombay), Bhavesh Developers vs. Assessing Officer & Ors., 329 ITR 249 (Bom.) and Purity Tech textile (P) Ltd. vs. A CIT, 325 ITR 459 (Bom.).

8. In the above background, we may now examine the fact-position of the instant case. The reasons recorded by the Assessing Officer to issue the notice u/s 148 of the Act read as under:-

“Reading of profit and loss account for the year under review reveals that the assessee company, who is engaged in manufacturing of pharmaceutical products, shows a turnover of Rs. 35.37 crores and a net profit of Rs. 13.93 crores. Perusal of the submission on record reveals that expenditure on account of advertisement under the accounting head ‘selling and distribution expenditure’, to the tune of Rs. 37,50,000 has been explained off as ‘giveaways’. The genuineness and nature of this expenditure, wholly and exclusively for the purpose of business has prima-facie remained to have been examined. Similarly, the element of expenditure to the tune of Rs.3 63000 debited under the head ‘interview plans’ has, prima facie, remained to have been verified.

Further it is submitted that during the assessment proceedings details of the selling and distribution expenses were called for. Though ‘advertisement giveaways’ and ‘interview plans’ expenses are the part selling and distribution expenditure, assessee has not submitted details regarding these expenses. Thus I have reason to conclude that assessee has failed to disclose fully and truly all material facts necessary for the assessment. Further AO has also not considered the same issues in the assessment order made u/s 143(3) of the Act.

Therefore, I have reason to believe that genuineness and nature of these expenditure, wholly and exclusively for the purpose of business has prima facie remained to have been examined and income chargeable to tax to the extent of Rs.41.13 lakhs has escaped assessment for the year.

Therefore, this is a fit case for reopening u/s 148 of the I. T. Act.”

A perusal of the aforesaid reasons reveal that in sum and substance the stand of the Assessing Officer is that the allowance of expenditure of Rs. 37,50,000/- on advertisement giveaways and Rs. 3,63,000/- on ‘Interview Plans’ under the head ‘selling and distribution’ expenditure, has led to an escapement of income. The reasons recorded by the Assessing Officer contain an averment that the assessee has failed to disclose fully and truly all the material facts necessary for the assessment. The reasons also point to the fact that genuineness and nature of the expenditure “remained to have been examined”. For all the said reasons, the Assessing Officer formed a belief that income chargeable to tax had escaped assessment to the extent of Rs. 41,13,000/-.

9. At the time of hearing, the learned representative for the assessee referred to the relevant pages of the Paper Book to point out that whatever details that had been called for by the Assessing Officer with regard to the selling and distribution expenses were filed and, in fact, the relevant explanation was also furnished in the course of original assessment proceedings. In this context, the learned representative firstly referred to page 26 of the Paper Book wherein is placed a copy of the notice issued by the Assessing Officer u/s 142(1) of the Act dated 15.10.2008 calling for various details which, inter-alia, by way of item no. 17(i) required the assessee to furnish the details of selling and distribution expenses. Further, at pages 36 to 57 of the Paper Book is placed copy of assessee’s reply dated 12.11.2008 to the earlier notice issued by the Assessing Officer and in particular, our attention has been drawn to paragraph 5 wherein not only the details of selling and distribution expenses have been enclosed, but also a brief note on the major heads of expenses included under the head of ‘selling and distribution’ expenditure. At page 40 of the Paper Book is placed, the details of selling and distribution expenditure which, inter-alia, contains a reference to the expenditure of Rs. 37,50,000/- under the head ‘advertisement giveaways’ and Rs. 3,63,000/- under the head ‘interview plans’. In view of the aforesaid fact-situation, the point to be examined is as to whether all material facts were available to the Assessing Officer on the impugned issue or else, was there a failure on the part of the assessee to disclose. The stand of the Revenue is that there was a failure to make full and true disclosure of material facts as required by the proviso to Sec. 147 of the Act. No doubt, the proviso to Sec. 147 of the Act uses the words “material facts” and thus, it means that furnishing of ‘just the facts’ would not suffice, but rather the requirement is to furnish “material facts”. It can be safely understood that what is required in the present context is the relevant or concerned facts. In terms of the material referred to by the learned representative, and which was available to the Assessing Officer during the original assessment proceedings, it is quite clear that assessee disclosed the details of selling and distribution expenses and also the various elements of expenses debited therein, including that of advertisement giveaways and interview plans. Therefore, the Assessing Officer was quite aware of the expenditure and if that was known to him, what further facts were required to be disclosed so as to be construed as “material facts” ? The reasons recorded do not allude to such further “material facts”, which the Assessing Officer expected the assessee to disclose, and which were necessary for his assessment but not disclosed. Therefore, factually speaking, we find enough weight in the plea canvassed that there has been no failure on the part of the assessee to disclose the material facts as required by the proviso to Sec. 147 of the Act and thus, in our view, the initiation of proceedings by issuance of notice u/s 147/148 of the Act was vitiated.

10. Remaining further on this aspect, we may now again peruse the reasons recorded. The charge made by the Assessing Officer is that the expenditure has “remained to have been examined” and, therefore, he entertained the belief about escapement of income. So however, it has not been either indicated or made clear as to why the Assessing Officer entertained the belief that income has escaped assessment. It is quite well-settled that escapement of income is required to be crystallized and identified, though on a prima facie basis, in the reasons recorded. It is also a well-settled proposition that reopening of an assessment u/s 147/148 of the Act is not intended to enable the Assessing Officer to conduct a verification/examination on a routine basis unless on a prima facie basis he is able to establish an escapement of income. A reading of the reasons recorded in the present case clearly imply that the reopening has been resorted to, in order to examine/verify the expenditure, without there being any justifiable reasons to establish escapement of income even on a prima facie Thus, on this aspect also, we find that the initiation of proceedings u/s 147/148 of the Act is infirm in the eyes of law.

11. Another aspect which is emerging from the reasons recorded is that the belief has been entertained only on the basis of the material which was already available with the Assessing Officer during the original assessment proceedings. Notably, the Hon’ble Bombay High Court in the case of Cartini India Ltd. vs. Addl. Commissioner of Income Tax, 314 ITR 275 (Bom.) observed that reopening of assessment based on material already considered in adjudication would amount to reviewing the assessment order by re-appreciating the material on record, which is not contemplated u/s 147 of the Act. In our view, in the context of the present controversy, it was imperative for the Assessing Officer to base his belief about escapement of income on the basis of fresh tangible material, and in the absence of the same, the reasons fall short of crystallizing the escapement of income, which is a sine qua non for invoking of Sec. 147 of the Act.

12. For all the aforesaid reasons, we find that the initiation of proceedings u/s 147/ 148 of the Act is untenable in law and the same is hereby held to be invalid.

13. Since we have held the initiation of proceedings u/s 147/ 148 of the Act to be invalid, the consequential assessment made by the Assessing Officer deserves to be set-aside. We hold so. Thus, Ground of appeal no. 1 raised by the assessee is allowed.

14. Since we have set-aside the impugned assessment itself, as lacking in jurisdiction, the issue raised in Ground of appeal no. 2 on the merits of the addition becomes academic and is not being adjudicated for the present. In the result, as far as Ground of appeal no. 2 is concerned, the same is treated as infructuous.

15. Resultantly, appeal of the assessee is allowed, as above.

Order pronounced in the open court on 22nd November, 2017

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