M/S. ASHOK LEYLAND LTD.,CHENNAI vs. DCIT, NCC-8(1), LTU-II,, CHENNAI

3.1. The CIT(A) failed to consider the fact that, initiation of reassessment proceedings is beyond a period of four years from end of relevant AY 2010-11 and in the absence of failure on part of the Appellant to disclose material facts as per First Proviso to section 147, the order passed by AO is required to be quashed in light of the following judicial precedents • Foramer v. CIT [2001] 247 ITR 436 (All.) (affirmed by SC in CIT v. Foramer France [2003] 264 ITR 566 (SC); • Fenner (India) Ltd. v. DCIT [2000] 241 ITR 672 (Madras HC)

Referring to the first proviso to Section 147 of the Act, the Ld. AR submitted that, where an assessee had filed a return of income and thereafter the assessment was completed either under section 143(3) or under section 147 of the Act, then in such case no notice under section 147 of the Act could have been issued beyond four years from expiry of relevant assessment year, unless the AO demonstrates in the recorded reasons that income had escaped assessment as a consequence of assessee's failure to disclose truly and fully all facts necessary for his assessment. According to the Ld. AR, in the present case, all the relevant information and details concerning the exchange fluctuation loss which was capitalized to fixed assets and the additional depreciation claimed on plant & machinery including the electrical installations at the factory premises, were made available at the time of original assessment and therefore it was not a case that the assessee had failed to disclose truly and fully all material facts necessary for assessment for that year and in that view of the matter, the AO could not have validly reopened the assessment for AY 2010-11 after the expiry of four years. The Ld. AR further submitted that even the reasons as recorded by the AO did not contain any averment to the effect that income had escaped assessment as a consequence of assessee's failure to disclose truly and fully all facts necessary for his assessment. According to the Ld. AR therefore, the AO's action of re-opening the assessment completed u/s. 143(3) after four years, deserves to be struck down for not satisfying the condition precedent set out in the first proviso to Section 147 of the Act.

Per contra, the Ld. CIT, DR submitted that the AO was in possession of external material in the form of audit objection based on which he formed his opinion that income chargeable to tax had escaped assessment. According to him, there is no requirement in law for the AO to explicitly demonstrate in his recorded reasons that there was any failure on the part of the assessee to disclose truly and fully all material facts in the course of assessment, but the same was inferable from the contents of the reasons. Relying on the explanation underneath the third proviso to section 147 of the Act, the Ld. DR submitted that mere production of books of accounts of the assessee company doesn’t satisfy that the assessee has disclosed fully and truly all the material facts necessary for that assessment year. According to the Ld. DR, it cannot be said that assessee has fully disclosed all material facts necessary for assessment. He therefore does not want us to interfere with the AO’s action of reopening of the assessment.

We have heard the rival submissions of both the parties. Before we advert to the facts in this case, let us first look into the well settled principles regarding reopening of assessment. To begin with, it should be kept in mind that the concept of assessment is governed by the time- barring Rule, and the assessee acquires a right as to the finality of proceedings. Queitus of the completed assessment is the Fundamental Rule and exception to this rule is re-opening of assessment by AO under section 147 or exercise of Revisional jurisdiction by CIT under section 263 of the Act. Therefore, the Parliament in its wisdom has provided safeguards for exercise of the reopening of assessment jurisdiction to AO; and revisional jurisdiction of CIT by providing condition precedent which is sine qua non for assumption/usurpation of jurisdiction. In the case of reopening of assessment, section 147 provides that where the Assessing Officer has reason to believe escapement of income [is the jurisdictional fact & law] he shall record his reasons for doing so and assess or reassess the income which has escaped assessment; and for exercising revisional jurisdiction u/s. 263 the CIT has to find the assessment order of the AO to be erroneous as well as prejudicial to the revenue. Unless the condition precedent is satisfied, the AO or the CIT can’t exercise their reopening jurisdiction or revisional jurisdiction respectively. The legislative history is that in respect to the reopening u/s. 147 of the Act, the Parliament by Direct Tax Laws (Amendment) Act 1987 w.e.f. 01.04.1989 had substituted “for reason to believe escapement of income” to “for reasons to be recorded by him in writing, is of the opinion’’ which gave unbridled subjective satisfaction to the AO was later substituted back to “reason to believe escapement of income’’, by the Direct Tax Laws (Amendment)

As noted, the AO, who is a quasi-judicial authority is empowered to reopen the assessment only in a given case wherein there is reason to believe escapement of chargeable income to tax, which he has to record before issuing notice u/s 148 of the Act. In this regard, it must be borne in mind that reasons to believe postulates foundation based on information, and belief based on reason. After a foundation based on information, is made, there still must be some reason, which should warrant the holding of a belief that income chargeable to tax has escaped assessment. It has to be kept in mind that the Hon’ble Supreme Court in Ganga Saran & Sons P. Ltd. Vs. ITO (1981) 130 ITR 1 (SC) held that the expression “reason to believe” occurring in sec. 147 “is stronger” than the expression “if satisfied” and such requirement has to be met by the AO in the reasons recorded before usurping the jurisdiction u/s. 147 of the Act. At this stage, authorities must understand the fine distinction between “reason to suspect” & ‘reason to believe”. Adverse information against an assessee may trigger “reason to suspect,” then the AO is duty bound to make reasonable enquiry to collect material which would make him form a belief that there is an escapement of income. And on satisfaction of such an event, then proceed to reopen the assessment and not before that event, because reason to believe is the jurisdiction requirement u/s 147 of the Act, and not the reason to suspect escapement of income. This subtle distinction should be borne in mind while adjudicating the legal issue raised by assessee.

And further, the reason to believe escapement of income should be that of AO, and not that of any other authority, because then it will be against one of the basic feature of the Constitution of India i.e., the Rule of Law, wherein the Parliament has empowered this reopening jurisdiction only to that of Assessing Officer and that is why if the reason to believe escapement of income is not that of AO, the assumption of jurisdiction to re-open, is vitiated; and resultantly bad in law, because assumption of jurisdiction to reopen will be on the basis of borrowed satisfaction.

And, if the AO intends to re-open the assessment [scrutinized u/s 143(3)] after four years from the relevant assessment year, then as per first proviso to section 147 of the Act, an additional safeguard or condition that escapement of income was due to fault of the assessee, in not fully and truly disclosing the material facts at the time of original assessment needs to be satisfied. In this context, it is gainful to refer to the Hon’ble Supreme Court decision endorsing the Full Bench decision of the Hon’ble Delhi High Court in CIT vs. Kelvinator of India Ltd. [320 ITR 561] wherein inter-alia, it was held that Assessing Officer has no power to review; and emphasized that AO in absence of “tangible material” should not resort to reopening. The Hon’ble Supreme Court held that merely on “change of opinion” the AO should not re-open the assessment because he doesn’t enjoy the power to review his own order.

Hence, in all cases where assessment is completed under section 143(3) or under section 147 of the Act and such concluded assessment is being sought to be reopened beyond four years, it is not only necessary for the AO to form reasonable belief that income had escaped assessment as envisaged in Section 147 of the Act but additionally he has to show that such escapement occurred as a result or consequence of assessee's failure to disclose truly and fully all facts necessary for assessment. The AO after obtaining information and documents from the assessee cannot supplement his conclusion about assessee's failure to disclose truly and fully material facts, if the recorded reasons do not refer to such failure. In the circumstances, where the AO initiates the reassessment proceedings beyond four years from the end of the relevant assessment year, then the AO is duty bound to demonstrate in his reasons recorded prior to issue of notice, the failure on the assessee's part to truly and fully disclose all material facts in the course of original assessment.

Before the Hon'ble Apex Court, the Revenue had argued that, it was to avoid detection of the actual source of funds of its subsidiaries, that the assessee did not disclose the complete details of the subsidiaries at the time of original assessment. It was further contended that certain documents concerning the bond issue were also not furnished at the time of the original assessment which amounted to failure on the part of the assessee to fully and truly disclose all material facts. Moreover, complaints had been filed by shareholders against the assessee subsequent to completion of assessment, which according to Revenue, also showed that there was non-disclosure of facts. However, the Hon'ble Supreme Court rejected all these contentions raised by the Revenue, by observing as under:

From the above binding ratio of decision of the Hon'ble Apex Court, the principle which thus emerges is that, the Revenue can take the benefit of the extended period of limitation of 6 years for initiating proceedings under the first proviso to Section 147 of the Act only if the Revenue can show that the assessee had failed to disclose fully and truly all material facts necessary for its assessment. The requirement of law in this regard is that, the assessee must disclose the primary facts before the AO and the assessee is not required to give any further assistance to the AO by disclosure of other facts. Thereafter, it is for the AO to decide as to what inference should be drawn from the primary facts disclosed and, the non-disclosure of other facts which may be termed as secondary facts is not necessary, so as to empower the AO to assume jurisdiction u/s 147/148 of the Act to reopen the concluded assessment in terms of the first proviso to Section 147 of the Act.

From the aforesaid understanding of law governing the issue at hand, we have to examine the reasons recorded by AO to reopen which has been already set out above, and test whether the condition precedent necessary to usurp the re-opening jurisdiction as required u/s. 147 of the Act is satisfied or not ? And in the present case, since four years have elapsed from the end of the relevant AY and original assessment has been completed u/s. 143(3) of the Act, it needs to be examined as to whether the addition condition precedent as laid down in first proviso to section 147 of the Act is also satisfied or not ? For doing that we have to examine on a standalone basis the reasons recorded by the AO to reopen the assessment, which is found placed at Page Nos. 1 & 2 of the Paper book, which reads as under:

On perusal of the recorded reasons, it is noted that, the AO had examined the depreciation statement which was furnished by the assessee and noted that, the assessee had claimed additional depreciation on electrical installation and data processing equipment, which in AO’s view, was not allowable on such assets. The AO is noted to have further observed from the depreciation statement that, exchange fluctuation loss was added to the WDV block of Plant & Machinery on which additional depreciation was claimed by the assessee. The AO was of the opinion that, additional depreciation is allowable only on new additions and not the exchange fluctuation loss. According to the AO therefore, excess additional depreciation had been allowed to the assessee as a consequence of which there was income escaping assessment.

Now, admittedly the assessment for AY 2010-11 was reopened by the AO, beyond four years. Therefore, apart from the requirement of law to form a reasonable belief that income otherwise chargeable to tax had escaped assessment, it was also incumbent upon the AO to satisfy the condition precedent set out in the first proviso to Section 147 of the Act.

Having gone through the notices/requisitions issued by the AO’s predecessor, details submitted by the assessee in original assessment, and the assessment order passed u/s 143(3) of the Act dated 21.05.2014, we of the considered view that , the assessee had disclosed all the primary facts before the AO in the original assessment concerning the additional depreciation claimed on electrical installations & data processing equipments installed at the factory premises as well as the exchange fluctuation loss component which was capitalized to the new additions to plant & machinery. Even the AO is found to have enquired into the claim of additional depreciation by his notice u/s 142(1) of the Act and to the extent to which he disagreed with the claim, he is found to have made disallowance in the original assessment order. According to us therefore, there was no failure on the assessee’s part to disclose the relevant material facts truly or fully in the original assessment completed u/s 143(3) of the Act. We find that the AO was also unable to demonstrate as to which relevant material fact did the assessee fail to declare truly or fully in the assessment completed u/s 143(3) of the Act on 21.05.2014, based on which the AO had usurped jurisdiction u/s 147 to reopen the assessments beyond four years. We are therefore inclined to hold that the AO did not satisfy the condition precedent in the first proviso to Section 147 of the Act for reopening of the assessment of AY 2010-11 beyond four years.

Further a bare perusal of the reasons recorded (supra) also does not reveal any statement by the AO to the effect which would throw light as to what was found by the AO which can be construed to be a failure on the part of the assessee to disclose fully & truly the material facts necessary for assessment during the original assessment, recording of which was sine qua non and had to be spelt out by the AO in the reasons recorded to validly assume jurisdiction u/s. 147 of the Act.

The AO in the reasons recorded is noted to have admitted the fact that the assessee had filed RoI for AY 2010-11 and revised the return declaring income as ‘nil’. The AO notes that, later the ITR was selected for scrutiny and the AO completed the original assessment u/s.143(3) of the Act on 21.05.2014 making certain additions arrived at a total income at Rs.328.88 Crs. In the second paragraph, he notes that the depreciation statement reveals that the assessee had claimed additional depreciation on ‘electrical installations and data processing equipments’ which he has reproduced in the chart format (supra). Thereafter, he simply notes that the additional depreciation is not allowable on the above assets and hence, additional depreciation claim of Rs.2,78,78,547/- requires to be withdrawn. In Para No.3, he notes that the assessee had claimed Rs.2,78,78,547/- on account of exchange fluctuation capitalized to plant & machinery block to the tune of Rs.5,85,51,519/- and that also needs to be withdrawn. Thus, it can be noted that from the reasons recorded before issuance of notice u/s.148 of the Act on 31.03.2017 [6th year from the end of the relevant assessment year] that the AO had not made any such averment that the assessment has been reopened for the failure on the part of the assessee to disclose fully and truly all the material facts necessary for that assessment year. It was not the AO's remark that, the material facts relating to, the new additions made to fixed assets, foreign exchange loss capitalized & additional depreciation claimed u/s 32(1)(iia) of the Act, were not disclosed truly and fully in the assessment completed u/s 143(3) of the Act, which is the precise requirement of law as can be discerned on reading of first proviso to section 147 of the Act. Thus, in our view, on this score also, the usurpation of jurisdiction u/s. 147 by the AO to reopen the assessment completed u/s. 147 of the Act after four years is bad in law and, therefore, has to be struck down for not satisfying the jurisdictional fact in law, which is a condition precedent to legally assume jurisdiction to reopen assessment after 4 years from the end of the relevant assessment year.

In this regard, it would be gainful to refer to the decision of the Hon’ble Supreme Court in the case of CIT v. Avadh Transformers (P.)

We may also refer to the decision of in the case of Tao Publishing (P.) Ltd. v. Dy. CIT [2015] 370 ITR 135 wherein the Hon'ble Bombay High Court has held that where the reasons supplied by the AO do not disclose that there was any failure on the part of the assessee to provide all the material facts, then it will have to be presumed that the assessee did not fail to make full and true disclosure of all material facts and hence the jurisdictional requirement set out in the first proviso to Section 147 for initiating reassessment, after the expiry of period of four years, shall be held to be not fulfilled. The relevant observations of the Hon'ble High Court is extracted below:

For the above reasons and following the law laid down by the Hon'ble Supreme Court in the case of NDTV Ltd. (supra), and other case laws, we hold that the reopening of the assessment for AY 2010-11 was bad in law in as much as the AO did not satisfy the condition precedent in first proviso to Section 147 of the Act which was sine qua non for usurping jurisdiction u/s 147 of the Act. As a consequence thereto, the order passed u/s 147/143(3) dated 28.09.2018 for AY 2010- 11 is held to be ab initio void and are therefore quashed.

In the result, appeal filed by the assessee is allowed.