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Income Tax Appellate Tribunal, DELHI BENCH : C : NEW DELHI
Before: SHRI R.K. PANDA & MS SUCHITRA KAMBLE
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER Assessment Year: 2006-07 LVMH Watch & Jewellery India P. Ltd., Vs. ACIT, 301-312, 3rd Floor, International Trade Circle-15(2), Tower, New Delhi. Block-F, Nehru Place, New Delhi. PAN: AAACL7814N (Appellant) (Respondent) Assessee by : Shri Vikas Srivastava, Advocate & Shri Mayank Aggarwal, Advocate Revenue by : Shri Anil Katoch, Sr.DR Date of Hearing : 19.12.2018 Date of Pronouncement : 26.12.2018 ORDER
PER R.K. PANDA, AM:
This appeal by the assessee is directed against the order dated 21st August, 2013 of the CIT(A)-8, New Delhi, relating to Assessment Year 2006-07.
The grounds raised
by the assessee are as under:-
1. The order passed by the Learned CIT(Appeals) ('Ld. CIT(A)'), confirming the assessment order passed by Learned AO ('Ld. AO') under section 143(3) read with section 147 of the Income Tax Act, 1961 ('the Act'), is bad in law and on the facts and circumstances of the case.
1. The Ld. CIT(A) has erred in upholding the re-assessment proceedings initiated by the Ld. AO, after expiry of four years from the end of the relevant assessment year, even though the appellant had disclosed fully and truly all material facts during assessment under section 143(3) of the Act.
2. The Ld. CIT(A) has erred in upholding action of the Ld. AO in passing the assessment by disregarding the objections raised by the appellant against the reopening of the assessment proceedings. 3. The Ld. CIT(A) erred in upholding the initiation of re-assessment by the Ld. AO, merely on the basis of the audit objections dated February 01, 2012 raised by 'Office of the Director General of Audit (Central Receipt)'. 4. The Ld. CIT(A) has erred in upholding the action of the Ld. AO in reopening of assessment without independent application of mind to determine whether the income of the appellant for the relevant year has escaped assessment. 5. The Ld. CIT(A) has erred in rejecting the contentions raised by the appellant by providing incorrect / irrelevant reasoning. 6. The Ld. CIT(A) has erred in making irrelevant observation in the order. 7. The Ld. CIT(A) has erred in confirming the action of the Ld. AO in disallowing the provision for inventory created by the appellant during the relevant year. 8. The Ld. CIT(A) as well as Ld. AO has erred in ignoring the judicial pronouncements relied upon by the appellant. 9. The Ld. AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act. 10. The above grounds of appeals are independent and without prejudice to one another.”
The facts of the case, in brief, are that the assessee is a company engaged in the business of wholesale trade of watches and accessories together with related spares, components, etc. It filed its return of income on 30th November, 2006 declaring loss of Rs.6,11,27,191/-. The assessment u/s 143(3) read with section 144C of the Act was completed on 6th September, 2009 determining loss of Rs.1,07,78,050/-.
Subsequently, the case of the assessee was reopened by issue of notice u/s 147, after recording the following reasons:-
“REASONS RECORDED U/S 147 OF THE INCOME TAX ACT, 1961. Assessment in this case was completed under section 143(3) of the Income Tax Act, 1961 at a loss of Rs. 1,07,78,050/-. Scrutiny of assessment records revealed that the assessee had made provisions of Rs. 1,63,04,874/- on account of “Inventories" as per Schedule-5 of the Balance Sheet and Schedule-14 of the Profit & Toss Account of the relevant previous year. The provisions not being actual expenditure should have been added back to the income of the assessee. The mistake resulted in over assessment of loss and under assessment of income by Rs. 1,07,78,050/- and Rs.55,26,824/- respectively involving tax effect of Rs.64,92,799/-. In view of the above, I have reasons to believe that income of Rs. 1,63,04,874/- has escaped assessment under the meanings of section 147 of the Income Tax Act, 1961.”
Subsequently, the Assessing Officer determined the total income of the assessee at Rs.55,26,824/-. After restricting the brought forward loss of Rs.1,80,15,267/-, he determined the taxable income at nil.
Before the CIT(A), the assessee challenged the validity of the reassessment proceedings as well as the addition on merits. However, the ld.CIT(A) rejected both the issues by observing as under:-
“I have perused the assessment order, written submission of the AR, grounds of appeal and discussed the matter with the AR very carefully. The ARs have two issues on this case. One legal issue is that the AO had reopened the case on the basis of audit objection and not done any preliminary inquiry before reopening the case u/s 148 of the IT Act. The ARs objected such reopening on the basis of audit objection and relied on the following case laws.
1. Indian and Eastern Newspaper Society vs. Commissioner of Income Tax (1979) 119 ITR 996
2. Duncan Services Limited vs. Income-tax Officer and other [1992] 198 ITR 264
3. Transworld International Inc. vs. Joint Commissioner of Income Tax (2005) 142 TAXMAN 35 (Delhi) 4. ICICI Home Finance Co. Ltd. vs. ACIT and Union of India 2012 (114) Bom. L.R. 2724, observed as under: 5. Commissioner of Income Tax vs. T.V.S Ltd. [2001] 249 ITR 306 (SC) 6. ITO vs. Satya Prakash Agarwal, (ITA No. 3729/Del/2011) I have discussed the matter with the ARs and convinced them that there should be some remedy for disposal of audit objection by the Assessment Officer or by the department, so such legal issues like non-reopening u/s 148 should not be viewed seriously. It is better to go on the merits of the case, so that government can collect proper tax for the development of the country. Therefore, I will go on the merits of the case and in my opinion the reopening of the case u/s 147/148 of the Income Tax Act on the above of audit objection is justified. The audit wing of the department or revenue audit of CAG are the agencies to give feed back to Commissioner/ Assessing Officer so that remedial action can be taken in proper time and revenue loss can be reduced in due course. Therefore, the objection of the appellants of reopening of the case u/s 147 of the Income Tax Act is not justified. The grounds no. 1,2,3,4 & 5 stands dismissed. The others 6,7,8,9 & 10 are either general in nature or premature to decide. Let me go on the merits of the case of disallowance of provision for inventory of Rs. 1,63,04,874/-. The appellant is the wholesale distributor of Swiss watches for India. These watches are sold in Indian market at a relatively low pace because the watches are very costly, therefore, the appellant company had created this provision of closing stock at estimated and an experience of management. The ARs could not produce any stock inventory book or any scientific method of valuation of such watches for preparing closing stock inventories at the end of each year for creating provision for inventory/stock. The appellant should have taken a realistic measure of reducing the prices of watches on actual sales realization price. Suppose the value of watch gets eroded after 2-3 years, then it should be written on value of the sales of the watch at the time of sale. There is no need of making such provision for closing stock any more. Hence, the addition made by AO of Rs. 1,63,04,874/- is hereby confirmed.”
7. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
8. The ld. counsel for the assessee, at the outset, submitted that the assessment has been reopened after a period of four years from the end of the relevant assessment year. Referring to the reasons recorded u/s 147 of the IT Act, he submitted that there is no allegation of any failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of the assessment. Relying on various decisions he submitted that when there is no allegation of any failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of the assessment, such reassessment proceedings are void ab initio. The ld. counsel for the assessee further submitted that the assessment was reopened on the basis of audit objections. Therefore, in view of various decisions the reopening of the assessment is null and void. He accordingly, submitted that on this preliminary issue itself the reassessment proceedings should be quashed and the subsequent proceedings thereafter should also be quashed.
The ld. DR, on the other hand, heavily relied on the order of the CIT(A).
We have considered the rival arguments and perused the material available on record. The reasons recorded for the reopening of the assessment have already been reproduced in the preceding paragraphs. A bare perusal of the reasons recorded shows that there is no allegation by the Assessing Officer of any failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of the assessment. In absence of such allegation of failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of the assessment, the reassessment proceedings have been held to be invalid by various decisions. The Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. vs. R.B. Wadkar (2004) 268 ITR 332 (Bom), has held that where 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 of that assessment year and notice was clearly beyond the period of four years, reassessment was barred by limitation. The relevant observation of the Hon'ble High Court from para 19 onwards read as under:-
“19. In the case in hand it is not in dispute that the assessment year involved is 1996- 97. The last date of the said assessment year was 31st March, 1997 and from that date if four years are counted, the period of four years expired on 1st March, 2001. The notice issued is dated 5th November, 2002 and received by the assessee on 7th November, 2002. Under these circumstances, the notice is clearly beyond the period of four years.
The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.
Having recorded our finding that the impugned notice itself is beyond the period of four years from the end of the assessment year 1996-97 and does not comply with the requirements of proviso to section 147 of the Act, the Assessing Officer had no jurisdiction to reopen the assessment proceedings which were concluded on the basis of assessment under section 143(3) of the Act. On this short count alone the impugned notice is liable to be quashed and set aside.
Since we are setting aside the impugned notice only on the first ground of challenge, in our opinion it is not necessary to go to the other question and record our findings in that behalf.”
The Hon'ble Delhi High Court in the case of Pr. CIT vs. Samcor Glass Ltd. & Ors., vide and 769 of 2015, 12th October, 2015, has also held similar view by observing as under:-
5. Apart from the fact that the impugned order of the ITAT suffers from no legal infirmity, the Court is of the view that on the face of it, the reasons for reopening of the assessment in both the cases did not satisfy the basic requirement of the law, in at least in two aspects. One was that the reopening was of assessment beyond four years after the AY for which the original assessment was framed and yet the reasons for reopening did not categorically state that there was a failure by the Assessees to disclose any material particulars on the basis of which there were reasons to believe that the income has escaped assessment. This Court has recently, in a decision dated 22nd September 2015 in of 2013 (CIT v. Multiplex Trading & Industrial Co. Ltd.), clearly stated in cases where reopening of assessment is beyond four years from the end of the relevant assessment year “the condition that there has been a failure on the part of the Assessee to truly and fully disclose all material facts must be concluded with certain level of certainty.
Secondly, the Court finds that at least in respect of one of the issues, viz., payment of interest on fixed deposits, the Assessees drew the attention of the Assessing Officer („AO‟) to the fact that the amount has already been offered to tax and tax had been paid and yet, in the order disposing of the objections, the AO is completely silent as regards this objection.
The Court is of the view that notwithstanding several decisions of the Supreme Court as well as this Court clearly enunciating the legal position under Section 147/148 of the Act, the reopening of assessment in cases like the one on hand give the impression that reopening of assessment is being done mechanically and casually resulting in unnecessary harassment of the Assessee.
The Court would have been inclined to impose heavy costs on the Revenue for filing such frivolous appeals but declines to do so since the appeals are being dismissed ex parte. However, the Court directs the Revenue through the Principal Chief Commissioner of Income Tax (Pr CIT) to issue instructions to the AOs to strictly adhere to the law explained in various decisions of the Supreme Court and the High Court in regard to Sections 147/148 of the Act and make it mandatory for them to ensure that an order for reopening of an assessment clearly records the compliance with each of the legal requirements. Secondly, the AOs must be directed to strictly comply with the law explained by the Supreme Court in GKN 7
Driveshafts (India) Ltd v. Income Tax Officer (2003) 259 ITR 19 (SC) as regards the disposal of the objections raised by the Assessee to the reopening of the assessment.”
The various other decisions relied on by the ld. counsel for the assessee also supports the view that where the reasons recorded by the Assessing Officer do not state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment of that assessment year and the notice was clearly beyond the period of four years from the end of the relevant assessment year, such reassessment proceedings are barred by limitation. There is also another aspect which merits consideration. It is an admitted fact that the reassessment was made on the basis of audit objection. The Hon'ble Supreme Court in the case of Indian and Eastern Newspaper Society vs. CIT, 119 ITR 996(SC) has held that the view expressed by internal audit party on a point of law could not be regarded as ‘information’ for purpose of initiating proceeding u/s 147(b). Accordingly, it was held that the reassessment proceedings on the basis of audit objection is not valid. In view of the above discussion, we hold that the reassessment proceedings initiated by the Assessing Officer and upheld by the CIT(A) are void ab initio and, therefore, the subsequent proceedings do not survive. The grounds raised by the assessee on this legal issue are accordingly, allowed. Since the assessee succeeds on this legal issue, the grounds on merit are not being adjudicated being academic in nature.
In the result, the appeal filed by the assessee is allowed. The decision was pronounced in the open court on 26.12.2018.