SHRI PACHAMUTHU RAVI,CHENNAI vs. DCIT, CIRCLE-1(3), CHENNAI

1. This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-18, (hereinafter ‘the Ld.CIT(A)’), Chennai, dated 22.01.2024 for the Assessment Year (hereinafter ‘AY’) 2014-15.

At the outset, the Ld.AR for the assessee brought to our notice that the appeal has been filed belatedly with 168 days delay and explained the delay with support of an affidavit as well as application for condonation of delay. After perusal of the contents of the petition for condonation of delay as well as affidavit, we find the reasons stated therein are sufficient to condone the delay and accordingly, we condone the delay and proceed to decide the grounds of appeal raised by the assessee.

Brief facts of the case are that the assessee an individual had filed his return of income for the AY 2014-15 on 01.10.2014 admitting total income of Rs.9,87,48,770/-. And the ibid return was selected for scrutiny and in response to notice u/s.143(2) and 143(2) of the Income Tax Act, 1961 (hereinafter the ‘Act’), the AO acknowledged that assessee participated in the assessment proceedings and upon his direction, furnished books of accounts, balance sheet, income & expenditure statement and other details as requisitioned. The AO after scrutinizing the return and after conducting relevant verifications, passed the original scrutiny assessment order u/s.143(3) of the Act on 30.03.2016 accepting the returned income. Thereafter, the AO passed rectification order subsequently on 14.12.2017 without any change in the income assessed u/s.143(3) of the Act on 30.03.2016. Thereafter the case of the assessee was reopened after the expiry of four years by issue of impugned notice u/s.148(1) of the Act on 25.02.2020. The reasons recorded by the AO prior to reopening of assessment, reads as under:-

Aggrieved by the aforesaid action of the Ld.CIT(A), the assessee is before us and has raised the following legal issues as under:-

The order of the learned CIT(A) -18 in upholding the re-opening of assessment which was completed under scrutiny is wrong, illegal and is opposed to law and facts of the case.

The learned CIT(A)-18 ought to have seen that the assessee has furnished full and true particulars of its income at the time of original assessment with reference to income alleged to have escaped assessment and that the assessment cannot be validly reopened under Section 147 of the Act, within four year or beyond 4 years, merely on the basis of change of opinion.

Assailing the action of the Ld.CIT(A), the Ld. AR submitted that the Ld. CIT(A) didn’t appreciate the contentions raised objecting to reopening of the regular/original assessment under Section 147 of the Act. He submitted that in the present case the original assessment was passed after scrutiny u/s.143(3) of the Act, and the proceedings u/s.147 of the Act were initiated after the expiry of four years from the end of the relevant assessment year. The Ld.AR therefore argued that for valid initiation of proceedings u/s.147 it was necessary for the AO to show that while recording the reasons u/s 148, he was prima facie satisfied that the escapement of the income chargeable to tax for the relevant assessment year was as a result of the failure on the part of the assessee to disclose truly and fully, all material facts necessary for assessment. He submitted that from the recorded reasons itself such satisfaction should have been discernible. Drawing attention to the reasons recorded (supra), the Ld.AR submitted that nowhere it was even prima facie apparent that in AO’s opinion escapement of income had resulted because of assessee’s failure to disclose truly & fully all material facts for his assessment. The Ld.AR therefore submitted that the twin conditions embedded in section 147 and proviso to it were not fulfilled. The Ld.AR submitted that initiation of reassessment would have been permissible only if the AO was having in his possession fresh and tangible material which came in his possession subsequent to passing of the order u/s 143(3) and its relation with formation of belief should have been spelt out in the reasons recorded to justify reopening. According to Ld. AR the AO had miserably failed to demonstrate the foregoing in the recorded reasons which vitiated the assumption of reopening-jurisdiction by the AO. The Ld.AR further submitted that in the course of original proceedings u/s 143(3), the assessee was directed to furnish various details arising from the ITR filed by the assessee showing Rs.9,87,48,700/-. And in compliance the particulars as requisitioned were furnished which thereafter were examined by the AO not only with reference to the assessee’s books of account, balance-sheet, income & expenditure, computation of income but also by enquiry from the assessee by issuing notice u/s.142(1) of the Act. The Ld.AR therefore submitted that there was no failure on the part of the assessee to disclose true and full material facts prior to completion of order u/s 143(3). In the circumstances therefore the reopening of assessment after four years was claimed to be impermissible.

Further according to Ld AR, the AO has re-opened the assessment without application of mind, which fact is evident from reading of the reasons recorded which reveals that AO erred in wrong assumption of fact that assessee was a company whereas assessee is an individual (refer the highlighted portion of reasons recorded). Therefore, according to the Ld.AR, there is per-se non-application of mind by the AO while recording reasons. Further, according to Ld.AR, it is per se evident from a reading of the reasons recorded (supra) that AO only on the basis of records found in the assessment folder has reopened the assessment meaning there was no fresh tangible material in the hands of the AO to justify reopening the assessment; and also failed to satisfy the proviso to section 147 of the Act, which is sine qua non before reopening the assessment after four years from the end of the relevant assessment year. The AO doesn’t spell out in his reasons recorded (supra) as to the source of information which was the foundation on which he has formed his belief that income has escaped assessment. Hence, in such a scenario, according to him, it can be safely inferred that the information regarding companies lending loan was collected/received/verified from the records available in the assessment folder and not from any outside source; and further, by not alleging failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment during original assessment, after four (4) years from the end of the assessment year, according to Ld.AR, the AO has not satisfied the essential condition precedent as provided u/s.147 of the Act to reopen the assessment.

The Ld.AR therefore summed up that besides there being no fresh tangible material available with the AO, as evident from reading of the reasons recorded, the impugned reopening of assessment was bad in law and therefore proceedings u/s.147 suffered from incurable infirmity and hence, the reopening of the assessment was legally impermissible and, therefore he urged for allowing the legal issue against re-opening.

Per contra, the Ld.DR submitted that there indeed was failure on the part of the assessee to submit full and true information at the time of original assessment and hence the Ld. CIT(A) rightly held that the initiation of reassessment by the AO was in order and correct in law. The Ld.DR submitted that in the first round the AO has not examined the applicability of section 2(22)(e) of the Act in the hands of the assessee and that this issue came to the notice of the AO only through the communication sent by the Audit party while they were reviewing the cases of M/s.TRP Properties and Investments P Ltd.,(TRPPIPL) as well as M/s. The Royal Café (TRC). Then only it came to the notice of the AO that the loan amount of Rs.9 crores was paid by M/s. TRP Properties to M/s. The Royal Café interest-free and the assessee was a common substantial share stockholder in both concerns. Therefore, according to Ld.DR, the audit parties communication to the AO constituted fresh tangible material to reopen the assessment and therefore the action of AO to reopen the assessment was justified and for such a proposition relied on the decision of the Hon’ble Supreme Court in the case of Indian & Eastern Newspaper Society vs. CIT [199 ITR 996 (SC)]. Therefore, the Ld.DR justified the action of the Ld.CIT(A) repelling the legal issue raised by the assessee by holding that during the original assessment the issue of applicability of Section 2(22)(e) of the Act was not considered by the AO, hence there is no question of change of opinion on this issue.

In his rejoinder, the Ld.AR countering the Ld.DR’s contention that based on audit objection, the AO reopened the assessment submitted that the key to reopen the assessment was the “reasons recorded” by the AO expressing his belief about escapement of income; and in that context, a reading of the ibid “reasons recorded” by the AO to reopen the assessment, nowhere mentions about him having received such a communication from the audit party. According to Ld.AR, it is settled position of law that when the legal issue challenging the jurisdiction of AO to reopen the assessment is examined, then the Tribunal should only examine on a standalone basis the reasons recorded by the AO to justify reopening the assessment. Drawing our attention to the “Reason to belief escapement of income” as recorded by AO in the instant case (supra), he pointed out that there is no mention/whisper about any information passed on by the audit party to the AO which enabled him to believe that there was escapement of income. According to Ld.AR, since the new fact i.e. audit party passing on the information about this issue is not discernable from the reading of the same, it is not permissible to ‘add’ that audit-party has conveyed to the AO the relevant facts which are stated in the “reasons recorded”. According to Ld AR, while examining the validity of reopening, nothing should be added or omitted from it. It should be considered on a stand-alone basis and examined whether AO satisfies the conditions prescribed in section 147 for valid assumption of reopening jurisdiction, as held by the Hon’ble Bombay High Court in the case of Hindustan Lever Ltd., vs. R.B. Wadkar [(2004) 248 ITR 332], wherein the lordships had inter-alia observed that -

And that the Hon’ble Supreme Court in the case of NDTV v. DCIT reported in [2020] 116 taxmann.com 151 (SC) has held that the AO is not allowed to alter his reasons, which must be considered only based on his recording. On the strength of the aforesaid binding legal position/principle, according to Ld.AR, the averment made by the Ld.DR that based on audit objection/material, the AO reopened the assessment should be ignored while examining the validity of the impugned action of the AO reopening the assessment u/s.147 of the Act. Moreover, according to Ld.AR, since four years have expired from the end of the relevant assessment year, it was essential for the AO to satisfy the additional condition precedent given in first proviso to section 147 i.e., failure on part of assessee to disclose fully and truly all material facts necessary for assessment. However, in the instant case, according to him, it can be noticed from perusal of reasons recorded that the AO has not fulfilled this condition stipulated in the first proviso to section 147 of the Act and again drew our attention to the reasons recorded and pointed out that the AO has not alleged any failure on the part of the assessee for not disclosing fully and truly all material facts necessary for the assessment. Therefore, according to Ld.AR, the essential condition for reopening the assessment after four years is not satisfied and therefore, the impugned action of the AO to reopen the assessment is bad in law and need to be quashed.

Heard both parties on the legal issue challenging the action of the AO to have reopen the assessment for AY 2014-15 which was originally framed u/s.143(3) of the Act after four (4) years from the end of the assessment year. Before we advert to deal with the legal issue, let us understand the settled position of law on the issue at hand. 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. Quietus 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, which condition precedents are 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 thereafter, reopen the assessment and then assess or reassess the income which has escaped assessment; and likewise 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 precedents are satisfied, the AO or the CIT can’t exercise their reopening jurisdiction or revisional jurisdiction of an assessment 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) Act, 1989. The Hon’ble Apex Court as well as the Hon’ble jurisdictional High Court as well as other Hon’ble High Courts have already held in plethora of cases the test of a prudent person instructed in law in understanding jurisdictional fact & law (mixed question of fact and law) the reason to believe escapement of income (supra).

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.

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 end of 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 also satisfied. Therefore in a case where the assessee’s case for a relevant assessment year has undergone scrutiny assessment u/s.143(3) of the Act and four years have expired from the end of the relevant assessment year, then AO in his reasons recorded to believe escapement of income has to record that due to failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, there was escapement of income. Non-fulfillment of the condition precedents as laid out in Section 147 of the Act, would vitiate the assumption of reopening jurisdiction. Further, 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.

In the light of the discussion (supra), it is noted that before the AO assumes jurisdiction to re-open an assessment it is necessary that the conditions laid down in the said Section 147 has to be satisfied viz., AO first of all should record “reason to believe” that the income chargeable to tax for that assessment year has escaped assessment. And, if the AO intends to re-open an assessment [scrutinized u/s.143(3)] after four (4) years from the relevant assessment year, then an additional condition needs to be satisfied viz escapement of income was due to fault of the assessee, in not fully and truly disclosing all the material facts necessary at the time of original assessment. If the conditions stipulated by statute are not satisfied at the first place, then it cannot be said that AO has validly assumed jurisdiction u/s.147 of the Act. Therefore, the question for consideration is whether on the basis of the reasons recorded by the AO, he could have validly reopened the assessment. For that it has to be seen as to whether the AO on the basis of whatever material before him, [which he had indicated in his “reasons recorded”] had reasons warrant holding a belief that income chargeable to tax has escaped assessment.

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 additional condition precedent as laid down in first proviso to section 147 of the Act is also satisfied or not ? It would be gainful to reproduce the proviso to section 147 of the Act which reads as under:-

The first proviso to section 147, is noted to come in to play, where an assessment under section 143(3) has been framed and four years have expired from the end of the relevant assessment year. In such an event, the first proviso prohibits the AO to take any action u/s.147 of the Act, unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

For examining as to whether AO has satisfied this essential legal requirement before assumption of reopening jurisdiction, we have to examine on a standalone basis the reasons recorded by the AO to reopen the assessment as held by the Hon’ble Supreme Court in the case of NDTV (supra) & the Hon’ble Bombay High Court in the case of Hindustan Lever Ltd., (supra), which is again reproduced as under:-

The AO in the reasons recorded, is noted to have not made a whisper of assessee’s failure to disclose fully and truly material facts necessary for assessment, which was an essential jurisdictional fact (ie., assessee’s omission to disclose material facts necessary for assessment) which is sine-qua non for successful assumption of jurisdiction and in the absence of the same, as evident from perusal of reasons recorded (supra) the jurisdiction of AO to reopen after four (4) years the assessment which has already undergone assessment u/s.143(3) of the Act is prohibited.

For the reasons discussed in the foregoing, therefore, we find that the essential condition precedents to invoke the jurisdiction to reopen the assessment for AY 2014-15 is absent; and consequently the action of AO to reopen the assessment without complying with the requirement of law is held to be wholly without jurisdiction and therefore the issuance of notice u/s. 148 of the Act is ab-initio void and consequent actions of AO are quashed.

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