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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K. & Ms. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER
ITA No.675/Bang/2020 Assessment year : 2006-07
M/s. Kwality Biscuits Pvt. Ltd., Vs. The Deputy Commissioner of C/o. Mysore Feeds Pvt. Ltd., Income Tax, Nayandahalli, Mysore Road, Circle 11(5), Bengaluru – 560 039. Bengaluru. PAN: AACCK 3121H APPELLANT RESPONDENT
Appellant by : Shri Narendra Sharma, Advocate Respondent by : Smt. Priyadarshini Baseganni, Addl.CIT(DR)(ITAT), Bengaluru.
Date of hearing : 12.10.2022 Date of Pronouncement : 17.10.2022 O R D E R Per Padmavathy S., Accountant Member
This appeal is against the order of CIT(Appeals), Bangalore-9, dated 28.8.2020 for the assessment year 2006-07.
Assessee is a private company engaged in the business of manufacture and sale of biscuits and job work. The assessee filed return of income for AY 2006-07 on 29.11.2006 declaring a total income of Rs.1,57,64,903. The case was selected for scrutiny and
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assessment u/s. 143(3) of the Income Tax Act (the Act) was completed by order dated 26.12.2018 after making an addition of Rs.4,49,463. Subsequently, the assessment was reopened by the AO by issuing a notice u/s. 148 of the Act dated 3.9.2012 for the reason that the receipts towards sale of land carried out during the year has not been routed through the Profit & Loss account of the assessee thereby reduced book profits for the purpose of section 115JB of the Act. The AO held that there is an escapement of income to this extent and therefore asked the assessee to furnish the return of income. The assessee vide letter dated 18.10.2012 requested the AO to treat the original return of income as the return filed in response to notice u/s. 148 and filed letter of preliminary objections opposing issue of notice u/s. 148 based on facts. The AO registered the objections of the assessee and concluded the assessment u/s. 143(3) r.w.s. 147 of the Act. The AO while recomputing the total income of the assessee considered the original cost of acquisition instead of the value as on 1.4.1981 and determined the income of the assessee at Rs.4,88,22,789. The AO also added the gain on sale of land to the book profit of the company. Aggrieved, the assessee preferred an appeal before the CIT(Appeals).
Before the CIT(Appeals), the assessee contended the legality of the issue of notice u/s. 148. On merits, the assessee submitted before the CIT(A) that the AO is not justified in considering the original cost of the land and also making adjustment to the book profits under the provisions of section 115JB under the facts and circumstances of the case.
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The CIT(Appeals) did not accept the contentions of the assessee and upheld the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal.
The assessee raised the following grounds of appeal:-
“1. The impugned order of the learned Commissioner of Income- tax passed under Section 250 of the Act in so far it is against the appellant is opposed to law, equity, weight of evidence, probabilities, facts of and the circumstances in the appellant's case. 2. The notice u/s.148 issued by the learned DCIT in case of the Appellant is void-ab-initio for want of proper jurisdiction since the necessary conditions required to issue notice u/s.147 were not present in the Appellant's case. 3. The impugned assessment order is bad in law in as much as the assessment is completed on an altogether different footing than the 'Reasons Recorded' to reopen the Appellant's case under section 148. 4. The issue of notice under section 148 is bad in law since the Appellant has neither concealed income nor has furnished inaccurate particulars of income. 5. The impugned assessment proceedings have been commenced purely as a result of a change in opinion and hence the same is bad in law and void-ab-initio. 6. The learned Authorities below are not justified in determining the income of the Appellant at Rs.4,88,22, 789/ - as against the returned income of Rs.20,82,889/- under the facts and in the circumstances of the Appellant's case. 7. Without prejudice to the above grounds it is further urged that the Commissioner of Income Tax (Appeals) is not justified in confirming the action of the Assessing Officer in adopting the WDV of the land, as on 01.04.2005, of Rs.11,67,700/-, as the cost of acquisition of the asset sold as against the market value of the same as on 01.04.1981, u/s.55(2)(1) of the Income-tax Act 1961, being
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Rs.1,04,81,625/- under the facts and circumstances of the Appellant's case. 8. The learned Commissioner of Income Tax (Appeals) is not justified in sustaining the decision of the Assessing Officer in invoking the provisions of section 115 JB of the Income-tax Act 1961 in the manner in which it is done under the facts and in the circumstances of the Appellant's case. 9. The Appellant craves leave to add, alter, delete, substitute or remove any or all the grounds urged above during the hearing of the Appeals. 10. For the above and other grounds to be urged during the hearing of the Appeals the Appellant prays that its appeals be allowed in full in the interest of equity and justice.” 6. The assessee also filed additional ground with regard to issue of notice u/s. 148 without obtaining the mandatory sanction u/s. 151 thereby the proceedings conducted are void ab initio. The effective grounds are as under:-
“1. The impugned notice under section 148 is without jurisdiction since the learned DCIT has failed to obtain the mandatory sanction u/s. 151 of the Income-tax Act 1961 before issuing the said notice therefore the assessment proceedings conducted pursuant thereto are void-ab-initio. 2. The Appellant urges that the levy of interest under section 234B of the Act is also bad in law as the period, rate, quantum and the method of calculation adopted by the learned DCIT by which the interest is levied are not discernible and are wrong on the facts of the appellants case.” 7. The ld. AR submitted that the additional grounds do not involve any investigation of facts, otherwise than on the record of the department and are pure questions of law. It is therefore prayed that the additional grounds may kindly be admitted. Reliance is placed on the
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decision of the Hon'ble Apex Court in the case of National Thermal Power Company Limited Vs. CIT, reported in 229 ITR 383 (SC).
We have heard both the parties on the admission of additional grounds and following the Apex Court decision in the case of National Thermal Power Company Limited (supra), we admit the additional grounds.
We first consider the legal contentions raised by the assessee with regard to the reopening of assessment. During the year under year under consideration the assessee has sold the land for a consideration of Rs.9,50,00,000. In the return of income assessee indexed the value as of 1.4.1981 and computed the long term capital gain. In the books of accounts, the assessee has credited the sale value of the land to the capital reserve account after adjusting the cost of land. The assessee had also filed computation of tax leviable u/s. 115JB of the Act as per which the book profit for an amount of (-) 5,34,59,161. Since the tax on the book profits is lower, the assessee had paid taxes under the normal provisions of the Act.
The AO reopened the assessment by issue of notice u/s. 148 and the reason recorded for reopening the case is as under:-
“1. The assessee company had filed its return of income declaring a net taxable income of Rs. 20,82,889/ -. The assessee company had also filed computation of tax leviable u/ s. 115JB as per which the book profit had been shown at (-) 5,34,59,161/-. The taxes had been paid under normal provisions. The tax on the taxable income had been calculated at Rs.4,16,578/-. After adding surcharge and education cess, the total taxes payable had been worked out at Rs.
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4,67,401/ -. The return filed by the assessee had been taken up for scrutiny and a scrutiny assessment had been completed by the Assessing officer on 26-12-2008. The scrutiny had also been a subject of first appeal and an appellate order dated 30-07-2009 is also received from Ld. CIT(Appeals). 2. As per the Balance sheet filed, the assessee company had shown capital reserve of Rs. 1,000/ - as on 31-03-2005 and the said capital reserve was shown at Rs. 9,38,33,300/- as on 31-03-2006. This addition to the capital reserve of an amount of Rs. 9,38,32,300/- had arisen on account of sale of land belonging to the assessee. The freehold land as on 31-03-2005 had been shown by the assessee at Rs. 11,67,700/ -. The assessee had shown a reduction of the value of its freehold land to the same extent of Rs. 11,67,700/- during 2005- 06. This clearly shows that the assessee company had sold the land during the year. 3. The receipt on account of the sale of land should have been brought by the assessee through the Profit and Loss account. It would be in violation of accounting policies to take the profit arising from the sale of land directly to the Balance sheet of the Company without bringing the same to the Profit and Loss account. To this extent, the assessee company has understated its profits worked out under companies Act to the extent of Rs. 9,38,32,300/ -. The non- showing of the said incomes has resulted in reduction in the book profit worked out u/s. 115JB of the Income Tax Act to the extent of Rs. 9,38,32,300/-. The correct book profit of the assessee should have been Rs. 9,38,32,300 Rs. 5,34,59,161 which equals to Rs. 4,03,73,139/-. The taxes leviable u/s. 115JB on the same works out to Rs. 30,27,985/- + surcharge and the education cess. This amount of tax payable is higher than the amount declared by the assessee under normal provisions of the Income Tax Act. 4. This evasion of tax payable u/ s. 115JB of the Income Tax Act had not been enquired into by the Assessing Officer during the course of scrutiny assessments conducted. The Assessing Officer had not taken any view on the matter as no enquiry had been conducted. The assessee had misrepresented the facts by taking the receipts from sate of land directly to the capital reserve account in the Balance sheet instead of bringing the same through the Profit and Loss account. The assessee has also misrepresented to the revenue by
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filing the wrong computation of tax liability u/s. 1I5JB of the Income Tax Act. 5. As per the regular provisions of computation of Income Tax Act, the assessee had shown the expenses of capital gains on account of sale of buildings held. While admitting the gross long term capital gains at Rs.9,50,00,000/- the assessee has claimed the indexed cost in acquisition of land at Rs. 1,04,81,625/-. The land held by the assessee had always been shown at a cost of acquisition of Rs. 11,67,700/-. The excess increased cost of acquisition declared by the assessee to the extent of Rs. 1,04,81,625/- needs to be reduced and brought to tax for an appropriate amount. 6. As per the Profit and Loss account filed, the assessee had claimed a loss on account of sale of assets at Rs. 77,82,682/-. However, as per the statement of income filed, the assessee has claimed the loss to be at Rs.50,46,912/ -. For the computation for profit or loss on sale of depreciable assets, the assessee should have reduced the WDV of the asset from the sale consideration received. Considering the variation between the two, it is seen that the assessee company has claimed excess loss to the extent of Rs. 27,35,770/-. This excess loss claimed by the assessee during the year also needs to be reduced. All these issues had not been verified by the Assessing Officer during the course of scrutiny proceedings conducted. The Assessing Officer did not have an opportunity for taking any stand on these issues. The Assessing Officer had neither taken an opinion nor can there be an allegation for any charge of opinion.” 11. The assessee submitted before the AO that there was no failure or lapse on the part of assessee and also contended that since the notice u/s. 148 is issued after the expiry of four years from the end of the AY 2006-07, no action shall be taken unless any income chargeable to tax has escaped assessment by reason of failure on the part of the assessee to make a return of income u/s. 139 or in response to notice u/s. 142(1) or section 148 or the assessee fails to disclose fully and truly all material facts necessary for the assessment. The assessee further submitted that the formation of reasons for reopening of the assessment
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is based on the balance sheet, profit & loss account and statement of total income filed by the assessee along with the return of income and not on any other additional information or material which has come to the knowledge of the AO and which is not disclosed by the assessee. The assessee further submitted that the balance sheet, profit & loss account and statement of income filed by the assessee disclosed the material facts such as gross consideration received, the indexed cost to be deducted from sale consideration and long term capital gain arising out of the said sale. The assessee therefore submitted that the mandatory condition required u/s. 147 for reopening assessment after expiry of period of four years does not exist in assessee’s case and therefore notice issued u/s. 148 is not sustainable.
The AO rejected the submissions of the assessee and proceeded to add the profit on sale of land to the book profit for computation of tax liability u/s. 115JB. The AO also rejected the cost as on 1/4/1981, considered by the assessee and took the original cost of acquisition for the purpose of computing the capital gain. Aggrieved the assessee filed appeal before the CIT(A).
Before the CIT(A), the assessee contended the legality of issue of notice u/s. 148 by reiterating the submissions made before the AO. The CIT(A) did not accept the contentions of the assessee by stating that the assessee has not challenged the jurisdictional issue before the AO and in this regard relied on the decision of Karnataka High Court in the case of N. Govindaraju v. ITO. The CIT(A) further held that the
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reasons for reopening have been properly recorded by the AO and that the income of the assessee has escaped assessment therefore the AO has correctly exercised jurisdiction.
Before us, the ld. AR reiterated the submissions made before the lower authorities. The ld. AR submitted that no new material or information came to the possession of the AO to come to the conclusion that certain income has escaped assessment. The ld. AR submitted that reopening of impugned assessment is purely borne out of the change of opinion and not based on any fresh material or additional evidence which has come to the possession of the AO. The ld AR further submitted that the materials based on which the additions in reassessment proceedings are done were already available before the AO during the original assessment proceedings and the details pertaining to the impugned transaction were also produced before the AO during original proceedings. It is argued by the ld AR that the assessee has fully and truly disclosed all material facts and therefore the AO is not justified in reopening the assessment. The ld. AR relied on the decision of the Karnataka High Court in the case of CIT v. Chaitanya Properties Pvt. Ltd. [2016] 67 taxmann.com 201 (Kar).
The ld. DR submitted written submissions, the extract of which is as given below:-
“2. With regard to legal ground, the Ld. AR relied mainly on Karnataka High Court's judgement in the case of Chaitanya Properties (Ref: Para 22). The judgement has decreed upon as to whether the reasons recorded by the AO (Assessing Officer) is sufficient even when the reasons did not spell out that the
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escapement of income was due to failure on the part of the assessee to disclose fully and truly all the material facts necessary for making assessment. 3. However, the facts are clearly distinguishable. The quoted case was that of JDA and such JDA was in knowledge of AO and the latter did not invoke the provisions of sec. 45(2) of the I.T Act while assessing the income. However, subsequently the AO invoked the provisions of sec. 45(2) of the Act while assessing the income u/s.147of the Act, considering the JDA as transfer of asset. The Hon'ble Court held that the reasons recorded by the AO mentioned only about the incidence of capital gain in the case of JDA and did not mention anything about failure on the part of assessee in disclosing all material facts fully and truly necessary for making assessment. 4. Whereas in the instant case, the reasons recorded clearly mention that the assessee has failed to credit the sale proceeds to the P&L account whereas it has credited the proceeds directly to capital Reserve account, which has resulted in reduction of income for computation of Adjusted Total Income for the purpose of AMT as per sec. 115JB of the IT Act. 5. Therefore, the ratio decidendi of the case law of Chaitanya Properties a cannot be applied here. In the quoted case law, there could be two opinions as to incidence of transfer of asset on JDA, as to whether the transfer is on the date of JDA or on the date of transfer of developed property. But, in the instant case, there is no scope for two opinions as to whether the sale proceeds are to be considered for computation of AMT or not. Hence the legal ground raised by the Ld. AR does not have legs to stand. 6. Therefore, it is requested that the same may be disposed off in favour of Revenue. Other legal grounds raised by the appellant are already rebutted by the AO in his detailed order. The Hon'ble, ITAT Bench is requested to dismiss all the legal grounds raised by the appellant and decide the case on Merits.” 16. We heard the rival submissions and perused the material on record. We will first look at the relevant provisions of section 147 which reads as follows:-
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“147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153, referred to as the relevant assessment year : 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 1 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.” 17. We notice that the Supreme Court in the case of CIT vs Kelvinator of India Ltd [2010] 320 ITR 561 (SC) has considered a similar issue of reopening of assessment and held that -
On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987 , re- opening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1-4-1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post 1-4-1989 , power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere
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change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989 , Assessing Officer 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 the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987 , Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from the Companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549 , dated 31-10-1989, which reads as follows : "7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to believe' in section 147. —A number of representations were received against the omission of the words 'reason to believe' from section 147 and their substitution by the 'opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, 'reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989 , has again amended section 147 to reintroduce the expression 'has reason to believe' in place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same." [Emphasis supplied]
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For the aforestated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs. 18. We also notice that the Karnataka High Court in the case of Chaitanya Properties (supra) has relied on the decision of the Hon’ble Supreme Court while deciding the issue of reopening of assessment. In assessee’s case, the impugned additions are done by the AO for the reason that -
(i) In the books of accounts of the assessee the profit on sale of land after adjusting the cost of land has been directly credited to the capital reserve and not routed through the profit & loss account which would have resulted in increased book profit for the purpose of section 115JB. (ii) The indexed cost of acquisition as calculated by the assessee is not based on the original cost of acquisition but on the cost as of 1.4.1981 which is not substantiated. (iii) Excess loss claimed on sale of depreciable assets. 19. We notice that the assessee has in the computation of total in shown in the long term capital gain arising out of the sale of land and also the short term capital gains from sale of depreciable assets (pg. 2 of PB). The materials based on which the AO has reopened the assessment i.e. the financial statements of the assessee, details of sale value etc., have already been available on records and the AO has not brought any new material for the purpose of reopening the assessment. The AO in the reasons recorded for reopening has stated that the AO in the original assessment did not have the opportunity for taking any stand on these issues and hence the reopening cannot be said to be done based on change of opinion. We are unable to appreciate this
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reason of the AO as in the original assessment u/s.143(3), the AO after applying his mind has not made any adjustment towards capital gains declared. The Hon’ble Supreme Court in the case of Kelvinator (supra) has laid down that the AO has no power to review but only to reassess based on any new material that has come to his possession. In assessee’s case, the AO has made the additions based on the materials which are part of assessment records which have already been verified during the original assessment u/s.143(3). The proviso to section 147 states that no reopening after a period of 4 years is possible unless there is 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. The AO in reassessment proceedings has raised questions on the facts which have been disclosed in the statement of income of the assessee and has made the addition by taking a different view on the cost of acquisition and the accounting treatment of the sale consideration. The accounting treatment in the books of accounts cannot be considered as failure to disclose fully and truly all material facts, since the assessee while computing the taxable income under the Act, has disclosed the details pertaining to the capital gains on sale of land and depreciable assets. In fact it is based on this disclosure, that the AO has taken the figures while arriving at the additions during the reassessment proceedings. We are of the considered view that this is not a case where the assessment is sought to be reopened on the reasonable belief that
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income had escaped assessment on account of failure of the assessee to disclose truly and fully all material facts that were necessary for computation of income but this is a case wherein the assessment is sought to be reopened on account of change of opinion of the Assessing Officer. In view of these discussions and considering the ratio laid down by the Hon’ble Supreme Court and the Jurisdictional High Court, we set aside the order of CIT(A) and quash the reassessment order. It is ordered accordingly.
We have considered the legal issue contended by the assessee have adjudicated the same in the above paras in favour of the assessee. Though ld AR and ld DR made submissions contending the issue on merits, in view of our decision on the legal issues, the grounds raised on merits have become academic and not warranting separate adjudication.
In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this 17th day of October, 2022.
Sd/- Sd/-
( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore, Dated, the 17th October, 2022. /Desai S Murthy /
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.