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Facts
The appeals were filed against an order pertaining to AY 1994-95, involving cross-appeals by the assessee and the revenue. The original assessment was completed, but later reopened under Section 147/148 of the Income-tax Act due to discrepancies in closing stock, production, and sales figures.
Held
The Tribunal held that the reopening under Section 147 was not justified as there was no new tangible material to support the belief of income escaping assessment. The AO's method of valuing closing stock at average selling price was also found to be incorrect.
Key Issues
Whether the reopening of assessment under Section 147 was justified based on the material available and if the valuation of closing stock was done correctly.
Sections Cited
147, 148, 143(3), 6D, 80-I, 80-IA, 80HHC, 234B
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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI SANDEEP SINGH KARHAIL, HON’BLE
PER NARENDRA KUMAR BILLAIYA, AM: I.T.A. No. 97/Mum/2005 & I.T.A. No. 327/Mum/2005 are cross appeals by the assessee and the revenue preferred against the order of the ld. CIT(A)-XXX, Mumbai dated 08/11/2024 pertaining to AY 1994-
I.T.A. No. 3581/Mum/2025 2
Both the appeals were heard together and are disposed off by this common order for the sake of convenience and brevity.
Grievance of the assessee reads as under:- “(1) Your appellants submit that the following grounds be considered independent of and without prejudice to each other:
The Commissioner of Income-tax (Appeals)-XXX, Mumbai [hereinafter referred to as the CIT(A)] erred in holding that, the Assessing Officer (hereinafter referred to as the AO) was justified in invoking the provisions of section 147 of the Income-tax Act, 1961 (the Act) and thereby issuing impugned order under appeal.
Your appellants submit that on the facts and circumstances of the case the CIT(A) ought to have held that, the provision of section 147 are not applicable in case of your appellants and the order issued by the AO is without juri iction and bad-in-law.
Your appellants pray that the order issued by the AO being bad-in-law should be quashed.
(2) The CIT(A) erred in holding that, the AO was justified in invoking the provisions of section 147 of the Act having shown reasons for re-opening to the appellants.
Your appellants submit that, the oral communication of the reasons by the AO without furnishing a copy thereof is contrary to the provisions of law. The CHA) accordingly ought to have held that re-opening is bad-in-law and the order passed by the AO ought to have been quashed.
Your appellants pray that the impugned order issued by the AO be quashed.
(3) The CITA) erred in holding that the AO was justified in re-opening the assessment as the proviso to section 147 does not have application to the case.
Your appellants submit that the CIT(A) ought to have held that as the AO had no reason to believe that income chargeable to tax has escaped assessment, the provisions of section 147 are invoked without juri iction and should have accordingly quashed the order issued by the AO.
Your appellants pray that the order issued by the AO be quashed.
(4) The CIT(A) erred in sustaining the addition of Rs.2,21,53,176 made by the AO to the total income of your appellants as sales not recorded in the books of accounts.
Your appellants submit that on the facts and circumstances of the case, the CIT(A) ought not to have maintained the addition of Rs.2,21,53,176 made by the AO to their total income. 3
Your appellants pray that the AO be directed to delete addition of Rs.2,21,53,176 made to their total income.
Without prejudice to the above, the CIT(A) erred in holding that the AO was justified in valuing the alleged difference in closing stock at average selling price to arrive at value of alleged sales not recorded in the books of account.
Your appellants, submit that the CIT(A) ought to have directed the AO to value the alleged difference in closing stock at cost and pray that the AO be directed accordingly.
(5) The CIT(A) erred in declining to adjudicate upon ground no. 3 to 7 raised in the memorandum of appeal reading as under on the contention that these grounds are decided by his predecessor in appeal filed by your appellants in respect of order issued under section 143(3) of the Act and your appellants have filed second appeal thereagainst:-
(3) The Addl. CIT erred in disallowing an amount of Rs.1,17,670 as against Rs.58,701 disallowed by your appellants under Rule 6D of the Income- tax Rules, 1962 on the ground that the disallowance under Rule 6D is to be computed with reference to each trip undertaken by the employee concerned and other expenses like local conveyance, telephone etc. are to be taken into account.
Your appellants submit that in accordance with the provisions of Rule 6D there is no warrant for computing the disallowance on individual trip basis and by considering local telephone etc.
Your appellants pray that the Addl. CIT be directed to recompute the disallowance under Rule 6D at Rs.58,701 and delete the addition of Rs.58,969 made to their total income.
(4) The Addl. CIT erred in disallowing an amount of Rs.4,20,775 out of advertisement expenses on the ground that this was incurred on production of advertisement/publicity films which is a capital asset.
Your appellants submit that on the facts and circumstances of the case and in any event, as 100% depreciation is allowable on such films under Income-tax Rules, the Addl. CIT should have allowed the expenses as deduction in computing their business income.
Your appellants pray that the Addl. CIT be directed to delete the addition of Rs.4,20,775 made to their total income.
Without prejudice to the above, the Addl. CIT erred in not granting depreciation thereon as was allowed by him for the assessment year 1992-93. Your appellants pray that the Addl. CIT be directed to grant the depreciation @ 25% as was allowed by him in the assessment year 1992-93. I.T.A. No. 3581/Mum/2025 4
(5) The Addl. CIT erred in holding that your appellants are not entitled to deduction under section 80-I in respect of new unit, namely, Films Coated unit. Your appellants submit that the new unit satisfies the conditions laid down under section 80-I of the Act and is accordingly entitled to deduction available under that section.
Your appellants pray that the Addl. CIT be directed to grant them deduction of Rs. 13,89,028 under section 80-1 in respect of this unit.
(6) The Addl. CIT erred in holding that your appellants are not entitled to deduction under section 80-IA in respect of new unit namely Liquid Formulation unit. Your appellants submit that the new unit satisfies the conditions laid down under section 80-IA of the Act and is accordingly entitled to deduction available under that section.
Your appellants pray that the Addl. CIT be directed to grant them deduction of Rs.11,82,613 in respect of this unit.
(7) The Addl. CIT erred in holding that for the purposes of computing deduction under section 80HHC of the Act, sales tax and excise duty should be included in total turnover. Your appellants submit that on a proper appreciation of the facts of their case and the provisions of section 80HHC of the Act, the Addl. CIT should have computed the deduction under section 80HHC of the Act without including sales tax and excise duty in total turnover. Your appellants pray that the Addl. CIT be directed to recompute the deduction accordingly.
Without prejudice to the above, your appellants submit that Addl. CIT should have computed deduction under section 80HHC of the Act on the basis of the income as assessed by him in the order under appeal.
Your appellants pray that the Addl. CIT be directed to recompute the deduction under section 80HHC on the basis of the income as finally determined."
Your appellants pray that the AO be directed to follow the decision of the ITAT in second appeal filed against order under section 143(3).
(6) The CIT(A) erred in holding that interest under section 234B is mandatory and accordingly the AO was justified in levying the interest.
Your appellants submit that provisions of section 234B are not attracted in their case and pray that the AO be directed to delete the interest levied under sectionn234B of the Act.
Your appellants crave leave to add to, amend, alter, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised.” 5
Grievance of the revenue reads as under:- “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition of Rs. 8,15,39,724/- made on account of suppression of sales.
On the facts and in the circumstances of the case and in law, the ld. CIT(A) failed to appreciate that there was difference in stock as per books and the physical stock, which had not been explained satisfactorily.”
The assessee has challenged the validity of the reopening of the assessee and since it goes to the root of the matter we adjudicate it first.
Briefly stated the facts of the case are that the assessee is an Indian company engaged in manufacturing of bulk drugs, drug formulations, pesticide formulations and mainly health-nutritional products. In this case, the original assessment u/s 143(3) of the Act was completed on 03/02/1997 which was subsequently reopened by ACIT vide notice dated 08/03/1999 u/s 148 of the Act. Pursuant to the said notice, the assessee filed its return of income. The reasons for reopening the assessment was the discrepancy in regard to the quantity of production sales and closing stock as per books and actual closing stock as per calculation annexed to the assessment order. The annexure was prepared on the basis of the statement of accounts and other annexures along with the return of income. The AO was of the opinion that the closing stock of some of the products shown in the annexure in the printed balance sheet of the company is less than the real closing stock calculated. Basis this the completed assessment was reopened. 6
Representatives of both the sides were heard at length on this issue. Case records carefully perused. The following annexure is the basis of reopening the assessment:-
The undisputed fact is that the alleged computation has been done on the basis of books of accounts, financial statement of accounts and the documents enclosed with the return of income. This leads to another undisputed fact that no material has been brought on record to justify the reopening and the reopening is totally based upon the documents available on the assessee record. Most importantly, the assessee has been consistently following the well recognised method of valuation of closing stock which is cost or market price whichever is lower. The AO has substituted the method by valuing the stock at the average selling price.
This line of action of the AO is not in consonance with the ratio laid down by the Hon’ble Supreme Court in the case of CIT Vs. 7
Kelvinator of India Ltd 320 ITR 561 wherein the Hon’ble Supreme Court under identical facts held that the AO 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 formation of belief. As no new tangible material has been brought on record, respectfully following the decision of the Hon’ble Supreme Court, the entire assessment is set aside and the notice u/s 148 of the Act is quashed.
Since we have quashed the impugned notice, we do not find it necessary to delve into the merits of the case. Accordingly, appeal of the revenue is dismissed and Ground No. 1 of the assessee’s appeal is allowed thereby other issues raised in assessee’s appeal become infructuous.
In the result, appeal of the assessee is partly allowed and appeal of the revenue is dismissed. Order pronounced in the Court on September, 2025 at Mumbai. Mumbai, Dated /09/2025 *SC SrPs *SC SrPs *SC SrPs *SC SrPs
आदेश की "ितिलिप अ"ेिषत/Copy of the Order forwarded to : अपीलाथ" / The Appellant
""थ" / The Respondent 2. संबंिधत आयकर आयु" / Concerned Pr. CIT 3. आयकर आयु" अपील
( ) / The CIT(A)- िवभागीय "ितिनिध ,आयकर अपीलीय अिधकरण, मुंबई /DR,ITAT, Mumbai, 5. गाड" फाई/ Guard file. 6. आदेशानुसार/ BY ORDER