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Facts
The assessee filed its return declaring a loss. The original assessment under Section 143(3) was completed with certain disallowances. Later, the AO initiated reassessment proceedings under Section 147 based on a discrepancy in opening stock, alleging it indicated escaped income.
Held
The Tribunal held that the reassessment was initiated based on the same material available during the original assessment and amounted to a mere change of opinion, which is impermissible. The reassessment proceedings were quashed.
Key Issues
Whether the reassessment proceedings initiated by the AO based on a 'change of opinion' without any fresh material were legally sustainable.
Sections Cited
143(3), 147, 148, 149, 142(1), 37
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI ABY T VARKEY & SHRI S. R. RAGHUNATHA
आदेश /O R D E R
PER S. R. RAGHUNATHA, AM :
This appeal by the assessee is filed against the order of the Learned Commissioner of Income Tax (Appeals) - 20, Chennai, [‘ld CIT(A)’] dated 30.08.2024 for the assessment year 2012-13.
The assessee objected the legality of the assessment order passed u/s.143(3) r.w.s. 147 of the Act dated 30.08.2024 on the following grounds: -
:-2-: ITA. No:2770 /Chny/2024 “1. The order of the Ld. CIT(A) is contrary to law, facts, circumstances of the case.
2. The Ld. CIT(A) has erred in re-opening the assessment even after completion after the original assessment u/s. 143(3) also the order passed without any fresh material and beyond 4 years in just a change of opinion.
3. The Ld. CIT(A) has erred in passing an order on borrowed satisfaction.
The Ld. CIT(A) has erred in issuing the notice u/s. 148 without following the procedures prescribed u/s.149.
5. For the above reasons and such other grounds that may be adduced at the time of hearing, the appellant prays that the additions sustained by the Ld. CIT(A) be deleted and render justice.”
The assessee is a Private Limited Company, in the business of manufacturing of Readymix Concrete. The return of income for the year under consideration was filed for the year AY 2012-13 on 28.01.2013 declaring a loss of Rs.1,05,59,126/-. In the assessment originally completed u/s.143(3) of the Act, the AO made disallowances under the head donations amounting to Rs.26,790/-, prior period expenses amounting to Rs.4,01,236/-, service tax amounting to Rs.5,46,557/-, other expenses amounting to Rs.2,90,824/- and lease permit amounting to Rs.57,51,080/- u/s.37 of the Act, in total amounting to Rs.69,89,697/-, to the total income of the assessee. The total income of the assessee, accordingly, was determined by the Assessing Officer at Rs.69,89,697/- in the assessment originally completed u/s.143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 25.02.2015.
Thereafter, the AO, upon verification of the statement of Profit and Loss Account furnished by the assessee during the course of the original assessment proceedings, observed a discrepancy in the opening stock for :-3-: ITA. No:2770 /Chny/2024 the current year, as carried forward from the closing stock of the preceding financial year, amounting to Rs.3,47,26,003/-. Subsequently, after the lapse of 4 years from the end of the AY 2012-13, reassessment proceedings were initiated u/s.147 of the Act after recording the reasons, by issue of notice u/s.148 of the Act on 25.03.2019. In response, the assessee filed return of income on 20.11.2019. Pursuant to the said notice, the reassessment was completed by the AO u/s.143(3) r.w.s 147 of the Act, vide order dated 31.12.2019, wherein an addition of Rs.3,47,26,003/- was made to the total income, without specifying the section under which such addition was made, on account of the difference in opening and closing stock, thereby determining the total income of the assessee at Rs.4,17,15,700/-.
4. Being aggrieved, the assessee preferred an appeal before the ld.CIT(A) against the assessment order, dated 31.12.2019, passed u/s.147 of the Act challenging the validity of the re-assessment proceedings. The sum and substance of the grievance of the assessee is that the ld.CIT(A) erred in confirming the reopening of the assessment as per law, as the AO erred in initiating reassessment proceedings on the same set of facts which were available to the AO at the time of original assessment proceedings.
The preliminary issue raised by the ld.AR pertains to the validity of the reassessment made by the AO u/s.143(3) r.w.s 147 of the Act. The ld.AR submitted that the assessee had fully and truly disclosed all primary facts necessary for the assessment, and there was no failure on the part of the assessee in this regard. It was pointed out that the original assessment was :-4-: ITA. No:2770 /Chny/2024 completed u/s.143(3) vide order dated 25.02.2015, and as per the first proviso to section 147, no reassessment could be initiated after the expiry of four years from the end of the relevant assessment year unless there was a failure on the part of the assessee to make a full and true disclosure of all material facts. The ld.AR further submitted that the AO had completed the original assessment after examining all relevant records called for. In the absence of any fresh material or tangible information coming to the AO's possession, the reopening of the assessment based on the same set of facts amounts to a mere change of opinion, which is not legally sustainable. The ld.AR submitted that a notice u/s.142 (1) of the Act dated 30.06.2014, forming part of the paper book at pages 104-105, was issued to the assessee. In response, vide letter dated 26.11.2014, evidenced at page 106 of the paper book, the assessee produced the requisite details and documents called for which were duly examined by the AO during the course of the assessment proceedings. It was further submitted that only after being satisfied with the submissions and records produced, the AO completed the assessment u/s.143 (3) of the Act by making certain disallowances to the total income as declared by the assessee. Further, it was pointed out from the original assessment order dated 25.02.2015, passed u/s.143 (3) of the Act, that the AO, after due verification of the allowances claimed in the profit and loss account and proper application of mind, disallowed certain expenses from the Profit and Loss Account under the heads donations amounting to Rs.26,790/-, prior period expenses amounting to Rs.4,01,236/-, service tax amounting to Rs.5,46,557/-, other expenses amounting to Rs.2,90,824/-, and lease permit charges amounting to :-5-: ITA. No:2770 /Chny/2024 Rs.57,51,080/-, u/s.37 of the Act. The ld.AR further submitted that the difference of Rs.3,47,26,003/- included in the opening stock of work in progress (Romaa Housing Division) for the financial year 2010-11 relevant to the AY 2011-12 was due to the consolidation of the entries appearing in the books of ‘Romaa Housing’ (acquired unit of assessee) maintained separately for the flat sales division in the books of assessee from the impugned AY 2012-13.
Therefore, ld.AR submitted that the issue of ‘difference in stock’ noticed by AO for the purpose of reopening of the original assessment based on the existing materials in the assessment records, which is not permitted under the law.
Further, the ld.AR drew our attention to the reasons recorded for reopening of assessment and stated that the profit and loss account was very much existing before the AO during the original assessment proceedings which is evident from the additions made to the returned income, were based on expenditures which were verified from the profit and loss account.
“The assessee company filed its return of income for AY 2012-13 on 28.01.2013 admitting loss of Rs.1,05,59,126/-. On verification of the same, it is seen that the profit and loss account for the AY 2012-13 revealed that the Work-in-process (Roma Housing Division) to the turn of Rs.3,47,26,003/- shown in the Opening Stock at Note 20 was not reflected in the Closing stock of AY 2011-12. Hence, the same need to be examined and taxed accordingly”.
Therefore, the ld.AR prayed for quashing the re-assessment order passed by the AO as invalid. In support of the legal contention challenging the validity of the re-assessment proceedings, ld AR relied on the decision of the Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India Limited reported in 320 ITR 561.
:-6-: ITA. No:2770 /Chny/2024
Further, ld.AR relied on the decision in the case of CIT vs. Bhanji Lavji (1971) 79 ITR 582 (SC) it was held that a mere change of opinion cannot form the basis. When the primary facts necessary for assessment are fully and truly disclosed, the ITO will not be entitled on change of opinion to commence proceedings for reassessment. Similarly, if he has raised a wrong legal inference from the facts disclosed, he will not, on that account, be competent to commence reassessment proceeds.
In ITO vs.Nawab Mir Barkat Ali Khan Bahadur (1974) 97 ITR 239 (SC) it was held that having second thoughts on the same material, and omission to draw the correct legal presumption during the original assessment do not warrant the initiation of proceeding u/s.147. In the absence of any fresh material, reopening would amount to change of opinion. Enclosing the copy of the case law on Page no. 8 - 14 of the Paper Book.
Per contra, the ld. D.R., on the other hand, strongly relied on the impugned order of the ld. CIT(A) in support of the revenue’s case on this issue and contended that the assessment having been reopened by the AO on the new issue, which had not been specifically examined in the assessment originally completed u/s 143(3) of the Act as evident from the reasons recorded by him, the reopening was in accordance with law.
We have heard the rival contentions, perused material available on record and gone through the orders of lower authorities along with the paper book and case laws relied by the assessee and ld.DR. In order to appreciate the contention of the ld.AR for the assessee on the preliminary issue raised
:-7-: ITA. No:2770 /Chny/2024 in this case challenging the validity of reopening of assessment, it is relevant to refer to the reasons recorded by the AO for reopening, which are extracted below: -
“The assessee company filed its return of income for AY 2012-13 on 28.01.2013 admitting loss of Rs.1,05,59,126/-. On verification of the same, it is seen that the profit and loss account for the AY 2012-13 revealed that the Work-in-process (Roma Housing Division) to the turn of Rs.3,47,26,003/- shown in the Opening Stock at Note 20 was not reflected in the Closing stock of AY 2011-12. Hence, the same need to be examined and taxed accordingly”.
A perusal of the aforesaid reasons recorded by the AO makes it 11. abundantly clear that the assessment originally completed by him u/s.143(3) of the Act was reopened by the AO on the basis of the same records as were available before him while completing the original assessment u/s.143(3) of the Act and therefore no new tangible material had come to his possession on the basis of which the assessment was reopened by him. Admittedly, the reasons as recorded by the AO themselves show that after verification of the ‘Profit and Loss account’ of the assessee, the AO reopened the completed assessment. Therefore, in our considered opinion, it cannot be said that the assessee has failed to fully and truly disclose all material facts necessary for the assessment. The reassessment initiated by the AO is based solely on the information already available in the assessment records, without any new or tangible material which in our considered view constitutes a mere change of opinion, which is impermissible in law. The AO had examined the profit and loss account, applied his mind, and made specific disallowances of certain expenditure claimed in the profit and loss account and concluded the original assessment proceedings, indicating that an opinion was formed at that stage
:-8-: ITA. No:2770 /Chny/2024 of original assessment proceedings and consequently, it was not permissible for him to exercise power u/s.147 of the Act on the same material on the ground that the ‘profit and loss account’ for the AY 2012-13 revealed that the incremental Work-in-progress (Roma Housing Division, acquired unit of assessee) to the tune of Rs.3,47,26,003/- shown in the Opening Stock at Note.20 was not reflected in the Closing stock of AY 2011-12. In light of the above facts and legal position, admittedly the AO had fully examined the profit and loss account, wherein the opening and closing stock is a part of the statement, during the course of the original assessment proceedings. The assessment was completed after due application of mind and specific disallowances were made. Therefore, reopening the assessment u/s.147 of the Act, based on the same material amounts to a mere change of opinion, which has been consistently held by various judicial precedents to be impermissible in law. Consequently, the reassessment proceedings initiated by the AO are without jurisdiction and liable to be quashed.
In the case of CIT vs Kelvinator of India Limited (supra), cited by the ld.AR for the assessee, it was held by the Hon’ble Supreme Court that after the amendment made w.e.f. 1st April, 1989, the AO has to have reason to believe that income has escaped assessment, but this does not imply that the AO can reopen an assessment on a mere change of opinion. It was held that the concept of “change of opinion” must be treated as an in-built test to check the abuse of power and hence the AO even after the amendments made in the relevant provisions from April 1, 1989 has the power to reopen an assessment provided there is tangible material to come to the conclusion that :-9-: ITA. No:2770 /Chny/2024 there was escapement of income from assessment. Applying the ratio laid down by the Hon’ble Supreme Court in the case of Kelvinator of India Limited (supra), we are inclined to hold that the reopening of assessment made by the AO in the present case was bad in law as the same was based merely on the change of opinion and the assessment completed by him u/s. 143(3) r.w.s 147 of the Act in pursuance thereof deserves to be quashed.
Since we have quashed the assessment order, we do not find it necessary to adjudicate on the merits of the case and it is kept open.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 19th September, 2025 at Chennai.