DCIT, CHENNAI vs. B.V.REDDY ENTERPRISES PVT LTD., CHENNAI

1 Subsequently, the Assessing Officer has reopened the assessment under section 147 of the Act by issuing notice under section 148 of the Act dated 27.02.2017 on the ground that there is an escapement of income. On the request of the assessee, reasons for reopening were furnished by the Assessing Officer. Further, notice under section 143(2) of the Act dated 24.08.2015 was also duly served on the assessee. In response to the same, the assessee filed its objection to the reopening of the assessment. After considering the objections of the assessee, the Assessing Officer has disposed off by a speaking order dated 17.08.2017. After following due procedure and considering the submissions of the assessee, the Assessing Officer has completed the assessment under section 143(3) r.w.s. 147 of the Act dated 07.11.2017 determining total income of the assessee at ₹.20,84,11,151/- after making additions/disallowances.

The assessee carried the matter in appeal before the ld. CIT(A) and challenged the reopening of assessment under section 147 of the Act as well as on merits. After considering the submissions and case law relied upon by the assessee, the ld. CIT(A) has held that the action of the Assessing Officer in reopening the assessment does not satisfy the proviso to section 147 of the Act and accordingly he quashed the assessment order by observing as under: “4A(3) CIT(A)’s inference and decision: The findings of the A.O were considered vis-a-vis the submissions of the appellant. It may be noted that the AO in her Order dated 17.08.2017 (vide para no.1.4 page no.2) referred to the explanation 1 to sec.147, while rejecting the assessee's contention with regard to the validity of the issue of notice u/s.14 7 to reopen the assessment. In this context, it is maintained that the explanation 1 to 147 talks about 'production of books of accounts on any other evidence from which material evidence could with due diligence have been discovered by the AO'. In the instant case, the question of producing the books of accounts and finding out where any income escaped assessment does not arise at all. The basic fact under which head income was be assessed was already reflected not only in the Profit and Loss account filed by the appellant but also in the statement of total income filed along with the original return of income. Therefore, the AO has not found out any new material regarding the escapement of income for the issue of notice u/s.148 of the Act. In order to bolster its submissions, the appellant furnished copies of the return of income submitted by the appellant for the A.Ys 2007-08 to 2013-

These returns were perused. They reveal the fact that the appellant has been regularly reporting income under the head 'Profits and gains of Business or Profession' as well as from other heads such as 'capital gains' and 'other sources'. The appellant's submissions are replete with material facts and judicial decisions to leverage their contentions that the reopening of the assessment beyond four years was not justified. It was submitted that there was no failure on the part of the appellant to disclose fully and truly the material facts. Furthermore, it was held the act of shifting heads of income and reworking income offered under different heads of income only denotes 'change of opinion' on the part of the A.O. The appellant also cited the order dated 28/9/2016 of the CIT(A)-1, Chennai for the assessment year 2008-09 who had held that the action of the A.O. in re-opening of assessment does not satisfy the proviso to section 147 and hence cannot be upheld. Taking into account the factual matrix as well as the prevailing legal opinion regarding re-assessment and the order of the CIT(A)-1 dated 28.09.2016, I am inclined to accept the contentions of the appellant. This ground of appeal is allowed. In view of this decision regarding re-assessment, the other grounds of appeal have become academic and do not require adjudication.”

The Revenue is in appeal before the Tribunal. The ld. DR strongly supported the order passed by the Assessing Officer and submitted that the reopening is valid.

On the other hand, the ld. Counsel for the assessee has submitted that in the reasons recorded, it is very clear that on verification of the return and assessment records and after examining all the details filed by the assessee, the Assessing Officer has completed the assessment order under section 143(3) of the Act dated 25.03.2013. However, the Assessing Officer, again on the basis of some information, passed the reassessment order under section 143(3) r.w.s. 147 of the Act dated 07.11.2017, which is beyond four years, without mentioning any failure on the part of the assessee to disclose any material in the reasons recorded by the Assessing Officer is bad in law and strongly supported the order passed by the ld. CIT(A) besides relying upon various case law.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The reasons recorded for reopening the assessment is extracted as under: Annexure ‘A' Return of income filed by the assessee on 13.10.2010 declaring taxable income of Rs.15,50,25,060/- was accepted in the scrutiny assessment order u/s 143(3) dated 25.03. 13. On verification of the return and assessment records revealed the following:

Assessment of income under the head “Income from other sources" 3.1.1 As per the P&L a/c filed by the assessee along with the return, it has earned income under the following heads during the previous year:-

1 We find that the assessee has fully and truly furnished all the details before the Assessing Officer and by considering the details filed by the assessee, the assessment was completed under section 143(3) of the Act dated 25.03.2013 and the Assessing Officer has accepted the claim of the assessee in respect of capital gains. Subsequently, the Assessing Officer wanted to treat the very same capital gain as business income on the basis of the same material available on record. Obviously, the reopening is only a change of opinion and no new tangible material came to the notice of the Assessing Officer to come to a different conclusion and thus, the change of opinion is not permissible in law as the judgement of the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. 320 ITR 561 (SC) applies.

2 In similar facts and circumstances, in assessee’s own case for the assessment year 2008-09, the ld. CIT(A) quashed the reassessment order and vide order in I.T.A. No.3293/Chny/2016 dated 29.07.2022, by considering the facts and circumstances and relying upon various case law, the Coordinate Benches of the Tribunal has decided the issue against the Revenue by observing as under:

2 Against the above decision of the Hon’ble Bombay High Court in the case of Marico Ltd. v. ACIT, the Department preferred SLP (Civil) before the Hon’ble Supreme Court and the Hon’ble Supreme Court dismissed the SLP vide order dated 01.06.2020 in Diary No. 7367/2020 and confirmed the Hon’ble Bombay High Court decision in which it was held that once the opinion is formed during the regular assessment proceedings, bars the Assessing Officer to reopen the same only on account of a different view. Admittedly, in the present case in hand, without any new tangible material, the Assessing Officer reopened the assessment to treat the very same capital gain as business income on the basis of the same material available on record.

3 Apart from the above, in this case, the assessment was reopened beyond four years from the end of the relevant assessment year under consideration, the provisions of section 147 of the Act applies. Once the proviso to section 147 of the Act applies, it is the duty of the Assessing Officer to prove that the assessee has failed to furnish fully and truly all material facts to complete the assessment. In this case the Assessing Officer was not able to establish that there is failure on the part of the assessee to disclose fully and truly all materials. Therefore, in our opinion, the reopening is invalid beyond four years from the end of the relevant assessment year.

4 In this connection, in the case of Fenner (India) Ltd. v. DCIT 241 ITR 672, the Hon’ble Juri ictional High Court has held that the reasons recorded by the Assessing Officer did not establish even prima facie, a failure on the part of the assessee to fully and truly disclose the material fact for the assessment and accordingly quashed the notice. The head-notes of the above judgement are reproduced as under: Mere escape of income is insufficient to justify the initiation of action under section 147 of the Income-tax Act, 1961, after the expiry of four years from the end of the assessment year. Such escapement must be by reason of the failure on the part of the assessee either to file a return referred to in the proviso or to truly and fully disclose the material facts necessary for the assessment. Unless the condition in the proviso to section 147 of the Income tax Act, 1961, is satisfied, the Assessing Officer does not acquire juri iction to initiate any proceeding under section 147 of the Act after the expiry of four years from the end of the assessment year. Thus, in cases where the initiation of the proceedings is beyond the period of four years from the end of the assessment year, the Assessing Officer must necessarily record not only his reasonable belief that income has escaped assessment but also the default or failure committed by the assessee. Failure to do so would vitiate the notice and the entire proceedings. If the Assessing Officer chooses to entertain the belief that the assessment has been made in the background of the assessee's failure to disclose truly and fully all material facts, it is necessary for him to record that fact. A notice issued without recording such a fact cannot be regarded as a valid notice. If the details placed by the assessee before the Assessing Officer were in conformity with the requirements of all applicable laws and known accounting principles, and material details had been exhibited before the Assessing Officer, it is for the Assessing Officer to reach such conclusions as he considered warranted from such data and any failure on his part to do so cannot be regarded as the assessee's failure to furnish the material facts truly and fully. Any lack of comprehension on the part of the Assessing Officer in understanding the details placed before him cannot confer a justification for reopening the assessment, long after the period of four years had expired. By notice dated December 18, 1996, the Assessing Officer reopened the assessment of the petitioner for the assessment year 1989-90, for the following reasons: (a) that excessive deduction had been allowed under section 80HHC; (b) that excessive allowance had been granted under section 32AB; and (c) that adjustment from the Modvat account had wrongly been allowed as deduction as payment of excise duty. On a unit petition: Held, that the reasons recorded by the Assessing Officer did not establish, even prima facie, a failure on the part of the assessee to fully and truly disclose the material facts for the assessment, because: (a) the assessee had placed before the Assessing Officer all statements, a perusal of which clearly showed that all the materials required for calculating the extent of benefits under sections 80HHC and 32AB and the actual calculation had been placed before the officer, The mistake, if any, was solely due to the mistake made by the officer and was not a mistake attributable to any failure on the part of the assessee. (b) a perusal of the statements filed by the assessee in the assessment proceedings showed that the assessee had placed before the Assessing Officer every relevant detail regarding the excise duty paid, the manner in which the payment was effected, the amounts paid through the deposit account, the amount adjusted from the Modvat account, the opening balance in the Modvat accrual account, the extent of the credit taken from that account, the extent of the amount utilised from that account, as also the closing balance as on March 31, 1989. All the information required in relation to the account had been placed before the Assessing Officer. The assessee could not have done anything more. The utilisation of the Modvat credit results in the payment of the excise duty on the final products to the extent of the credit utilised. The description given by the assessee to the payment so made as excise duty paid was the correct and normal term to describe the payment and no fault could be found with the assessee for using that term and not bifurcating that amount into the amount paid through the deposit account and the amount paid by adjustment of the Modvat credit. There was no failure on the part of the assessee to disclose truly and fully any fact in relation to the Modvat account or the amount of excise duty paid. The notice was liable to be quashed.

5 In the case of Hindustan Lever Ltd. v. R.B. Wadkar, ACIT (1) 268 ITR 332, the Hon’ble Bombay High Court has held as under: “Held, that the notice was clearly beyond the period of four years. The reasons recorded by the Assessing Officer nowhere stated that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for that assessment year. Hence, the Assessing officer had no juri iction to reopen the assessment proceedings. The notice was not valid and was liable to be quashed.” Similarly, in the case of Hindustan Lever Ltd. v. R.B. Wadkar, ACIT (2) 268 ITR 332, the Hon’ble Bombay High Court has held as under: “Held, that it was clear that the Revenue could not establish any lapse or failure on the part of the assessee-petitioner to disclose fully and truly all material necessary for the assessment of the petitioner for the assessment year in question. The notice was not valid and was liable to be quashed.”

6 Further, in the case of Sadbhav Engineering Ltd. v. DCIT [2011] 333 ITR 483 (Guj), the Hon’ble Gujarat High Court has held as under: “Held, allowing the petitions, that on a plain reading of the reasons recorded, it was apparent that they were totally silent as regards any failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessments for the relevant assessment years. Whether or not there was any failure on the part of the assessee in disclosing fully and truly all material facts necessary for his assessment, was a matter of fact and there could be no deemed failure as was sought to be contended on behalf of the income-tax authorities. Therefore, in the absence of any failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the assessment years 2003-04 and 2004-05, the notices under section 148 having been issued after the expiry of period of four years from the end of the relevant assessment years, the very initiation of proceedings under section 147 stood vitiated and could not be sustained.”

7 In the case of CIT v. Sil Investments Ltd. 339 ITR 166, the Hon’ble Delhi High Court has observed and held as under: “The assessments of the assessee for the assessment years 2001-02 and 2002-03 were reopened after four years on the ground that an amendment to section 80HHC of the Income-tax Act, 1961, had been made with retrospective effect from April 1, 1998. The conditions were not there in section 80HHC at the time when the assessee filed the returns or even the original assessments were made. The Commissioner (Appeals) and the Tribunal held that the invocation of the proviso to section 147 to be invalid and set aside the reassessments under section 147/148. On appeal: Held, dismissing the appeals, that the findings of the Tribunal was that all the relevant facts were available on record and that it could not be said that at the time when the assessee filed the returns, he had failed to disclose fully and truly all material facts necessary for the assessments because the amendment which was introduced retrospectively was not there. The law cannot contemplate the performance of an impossible act. Thus, the Tribunal rightly concluded that the proviso to section 147 could not be invoked merely because there was an amendment in the future which was introduced retrospectively and covered the period in question.”

8 Over and above, way back in 1976 itself, the Hon’ble Apex Court has predominantly laid down the law that the impugned notice issued after four years of the end of the relevant assessment year is not sustainable in law and is liable to be quashed, when there was not even a whisper in the reasons that there was any omission or failure on the part of the assessee in disclosing fully and truly the material facts for assessment. The relevant head-notes in the judgement delivered by the Hon’ble Supreme Court in the case of ITO v. Lakhmani Mewal Das reported in (1976) 103 ITR 437 are reproduced as under: “The reasons for the formation of the belief contemplated by section 147(a) of the Income-tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for re-opening the assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening the assessment even if the information is wholly vague, indefinite, far-fetched and remote, The reason for the formation of the belief must be held in good faith and should not be a mere pretence. The original assessment for the assessment year 1958-59 was made on the respondent after allowing deduction of a sum of Rs. 10,494 'towards interest to certain creditors. Thereafter, by a notice under section 148 of the Income-tax Act, 1961, dated March 8, 1967, served on the respondent on March 14, 1967, the Income-tax Officer sought to reopen the assessment. In his report made in February, 1967, to the Commissioner for reopening the assessment of the respondent for the assessment year 1958-59 after four years under section 147(a) of the Income-tax Act, 1961, two reasons were mentioned: (i) that M. K., who was shown to be one of the creditors of the respondent had since confessed that he was doing only name-lending; and (ii) that N.M., D.K.N., B.S. and others, whose names too were mentioned in the list of the creditors of the respondent, were known name-lenders. The respondent thereupon filed a writ petition claiming that there was no material before the Income-tax Officer on which he could have reason to believe that income chargeable to assessment for the year had escaped assessment by reason of the respondent's failure to disclose material facts, and stated that he had produced all books of account, bank statements and other necessary documents in connection with his return. The High Court, by a majority, held that the pre-conditions for the exercise of juri iction under section 147 were not fulfilled. On appeal: Held, affirming the decision of the High Court, on the facts, (i) that the second ground could not have led to the formation of the belief that the income of the respondent chargeable to tax had escaped assessment for the assessment year 1958-59 because of failure of the assessee to disclose fully and truly all material facts; CHHUGAMAL RAJPAL V. S. P. CHALIHA [1971] 79 ITR 603 (SC) followed (ii) that since there was nothing to show that the confession of M.K, related to a loan to the assessee, much less to the loan which was shown to have been advanced by that person to the respondent, in the first ground the live link or close nexus which should be there between the material before the Income-tax Officer and the belief which he was to form was missing or in any event too tenuous to provide legally sound basis for reopening the assessment. Two conditions have to be satisfied before an Income-tax Officer acquires juri iction to issue notice under section 148 in respect of an assessment beyond the period of Jour years but within a period of eight years from the end of the relevant year, viz., (i) the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and (ii) he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee (a) to make a return under section 139 for the assessment year to the Income-tax Officer, or (b) to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must co- exist to confer juri iction on the Income-tax Officer. It is also imperative for the Income-tax Officer to record his reasons before initiating proceedings as required by section 148(2). Another requirement is that before notice is issued after the expiry of Jour years from the end of the relevant assessment years, the Commissioner should be satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. The duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income-tax Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Income-tax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment. The grounds or reasons which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with juri iction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of grounds which induce the Income- tax Officer is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law.”

After considering various case law including the judgement of the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. (supra), the ld. CIT(A) has rightly held that the action of the Assessing Officer in reopening the assessment does not satisfy the proviso to section 147 of the Act. We find no infirmity in the order passed by the ld. CIT(A) and thus, the ground raised by the Revenue is dismissed. In the result, the appeal filed by the Revenue is dismissed.” 9. 6.3 In the present case also, we are of the considered opinion that the reopening is only a change of opinion and no new tangible material came to the notice of the Assessing Officer to come to a different conclusion and thus, the change of opinion is not permissible in law as per the judgement of the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. (supra). Moreover, when the assessment is reopened after four years from the end of the relevant assessment year under consideration, the Assessing Officer has to establish that there is a failure on the part of the assessee to disclose fully and truly all material facts to complete the assessment. In this case, the Assessing Officer has failed to establish that there is a failure on the part of the assessee and therefore, the reopening of the assessment is invalid and bad in law. In view of the above facts and circumstances and respectfully following the decision of the Coordinate Benches of the Tribunal in assessee’s own case for the assessment year 2008-09, we sustain the appellate order passed by the ld. CIT(A) in quashing the assessment order passed under section 143(3) r.w.s. 147 of the Act dated 07.11.2017. Thus, the grounds raised by the Revenue are dismissed.

In the result, the appeal filed by the Revenue is dismissed. Order pronounced on 04th November, 2022 at Chennai. (MANOJ KUMAR AGGARWAL) JUDICIAL MEMBER Chennai, Dated, 04.11.2022 Vm/-