VASU AGENCIES,,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-4(1), HYDERABAD

Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of distribution of pharmaceutical goods. It filed its return of income on 28.09.2010 declaring total income at Rs.13,62,470/-. The assessment was completed u/s. 143(3) on 29.03.2012 determining the total income at Rs.15,74,100/-. Subsequently, the AO reopened the assessment u/s. 147 of the I.T.Act by recording the following reasons: Office of the Asst. Commissioner of Income Tax, Circle-4(1), Hyderabad F.No.ACIT/C-4(1)/Reason/148/2015-16 Dated:07-08-2015

Accordingly, notice u/s. 148 of the I.T.Act was issued to the assessee on 05.11.2014. The assessee in response to the same filed a letter stating that the return already filed for the AY 2010- 11 may be treated as return filed in response to notice u/s. 148 of the I.T.Act.

During the assessment proceedings the AO observed that assessee disclosed an additional income of Rs. 35 lakhs for AY 2009-10 during the course of survey proceedings conducted on 04.02.2009. But the assessee firm has shown the entire closing stock of Rs. 1,56,03,922/- (including the additional income of Rs. 35 lakhs) as opening stock for the AY 2010-11, which is not allowable. When the AO confronted the same to the assessee, the assessee submitted as under:-

However, the AO was not satisfied with the arguments advanced by the assessee. He observed from the return of income filed and the schedules thereon that the assessee has increased the opening stock to the extent of the disclosure made during the course of survey operation. He observed that the disclosure made during the course of survey operation is on account of certain discrepancies pointed out and the same is in addition to the normal income. According to the AO, the inclusion of additional income offered to the closing stock is against the quantum disclosure made during the course of survey operation and reduces the tax effect to the extent of disclosure thereby resulting in regularization of survey operation without any outcome as envisaged. He, therefore did not accept the submission of the assessee and made addition of Rs. 35 lakhs.

Before ld.CIT(A), the assessee apart from challenging the addition on merit challenged the validity of the reassessment proceedings. However, the ld.CIT(A) dismissed the appeal filed by the assessee on both the counts. The assessee approached the Tribunal and the Tribunal vide order dated 29.11.2018 vide ITA No.1622/Hyd/17, 1623/Hyd/2017 & 1624/Hyd/2017 for AY 2010-11 dismissed the appeals. Subsequently, the assessee filed an M.A stating that the legal ground raised by the assessee was not adjudicated. The Tribunal vide M.A.No.27,28 & 29/Hyd/2019 order dated 31.05.2019 recalled the order for the limited purpose of adjudicating the issue of validity of reopening of the assessment. Hence, the above three appeals are recalled matters for the limited purpose of adjudicating the validity of the reopening of the assessment.

Ld.counsel for the assessee, referring to the reasons for reopening of the assessment submitted that the assessee has included the extra income of Rs. 35 lakhs offered at the time of survey in the closing stock of FY 2008-09 and the gross profit was increased to that extent. He submitted that the AO passed the order relevant to AY 2009-10 u/s. 143(3) on 22.12.2011 copy of which is placed at page 24 to 27 of the paper book. Referring to the order passed u/s. 143(3) r.w.s. 147 of the I.T.Act, 1961 order dated 22.12.2011 for AY 2009-10, the ld.counsel for the assessee drew the attention of the Bench to the following observation of the AO

He submitted that the closing stock of FY 2008-09 has been taken as the opening stock of FY 2009-10 and therefore, in absence of any tangible material before the AO, he could not have reopened the assessment. Referring to a series of decisions, he submitted that in absence of any tangible material before the AO, he cannot reopen the assessment, especially when there is no other discrepancy or addition on account of which the case was reopened. He submitted that when the closing stock of FY 2008- 09 has been shown as the opening stock of FY 2009-10, there is absolutely no error for which the AO could have reopened the assessment. Referring to the following decisions, he submitted that the reopening is not valid

The ld. DR on the other hand heavily relied on the order of the ld.CIT(A) in upholding the validity of the reassessment proceedings.

We have heard the rival arguments made by both the sides, perused the orders of the ld. AO and ld.CIT(A) and the paper book filed on behalf of the assessee. We find the AO in the instant case reopened the assessment u/s. 147 of the I.T.Act recording the reasons which have been reproduced in the preceding paragraph. We find the ld.CIT(A) upheld the validity of the reassessment proceedings by observing as under:-

It is the submission of the ld.counsel for the assessee that there is no mistake in the return filed by the assessee and the value of closing stock for FY 2008-09 has been taken as the

We find merit in the above arguments of the ld.counsel for the assessee. Admittedly, the assessee in the instant case offered the additional income of Rs. 35 lakhs by increasing the value of closing stock and such closing stock in the audited accounts for the FY 2008-09 was shown at Rs.1,56,03,220/- copy of which is placed at page 43 of the paper book. The AO in the order passed u/s. 143(3) for AY 2009-10 was also aware of the same but still he completed the assessment without disturbing the closing stock. Therefore, once the closing stock as on 31.03.2009 was accepted at Rs. 1,56,03,222/-, the same has become the opening stock for AY 2010-11 and therefore, in absence of any other tangible material before the AO, he could not have reopened the assessment.

As to what constitutes valid "reasons to believe" is no longer a matter of debate. So long as the law declared in Kelvinator (supra) stands, a valid reopening of assessment has to be based only on tangible material to justify the conclusion that there is escapement of income. In the present case the note forming part of the return clearly mentioned and described the nature of the receipt under a non-compete agreement. The reasons for the notice under section 147 nowhere mentioned that the revenue came up with any other fresh material warranting reopening of assessment. In these circumstances, the Court is of the opinion that mere conclusion of the proceedings under section 143(1) ipso facto does not bring invocation of powers for reopening the assessment. We are satisfied that the Tribunal's reasons are justified and do not call for any interference.

The various other decisions relied on by ld.counsel for the assessee also supports his case to proposition that in absence of any tangible material before the AO, he could not have reopened the assessment for the impugned assessment year. In our opinion, mistake, if any has been committed by the assessee in AY 2009-10 and the AO was also aware of the same. Therefore, instead of reopening the assessment for AY 2009-10, the AO could not have reopened the assessment for AY 2010-11. In this view of the matter, we quash the reassessment proceedings and the grounds raised by the assessee on this issue are allowed.

In ITA No.1623 & 1624/Hyd/2017 also the assessee has challenged the validity of the reassessment proceedings. Since facts of the above appeals are identical to the facts in ITA No.1622/Hyd/2017 for AY 2010-11, therefore, following similar reasonings the grounds challenging the validity of reassessment proceedings in the above two appeals are allowed.

In the result, all the three appeals filed by the respective assessees are allowed.