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Facts
The assessee, Southern Enterprises, an exporter of Garnet Sand, filed its return for AY 2009-10. The AO reopened the assessment after four years, citing improper allocation of closing stock by the assessee, which allegedly led to escapement of income. The assessee challenged the reopening on the grounds that the AO failed to satisfy the condition precedent for reopening beyond four years.
Held
The Tribunal held that the AO failed to establish that the assessee had failed to disclose fully and truly all material facts necessary for the assessment, which is a mandatory condition for reopening after four years. The AO's original assessment order had already considered the financials and stock allocation. Therefore, the reopening was considered without jurisdiction.
Key Issues
Whether the Assessing Officer satisfied the conditions for reopening assessment after four years, specifically the requirement to prove the assessee's failure to disclose material facts fully and truly.
Sections Cited
Section 147, Section 148, Section 143(3), Section 10B
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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & MS. PADMAVATHY. S
आदेश / O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-10, (hereinafter referred to as ‘Ld.CIT(A)‘), Chennai, dated 15.09.2017 for the Assessment Year (hereinafter referred to as ‘AY‘) 2009-10.
At the outset, the Ld.AR of the assessee has assailed the action of the AO reopening of assessment after expiry of four (4) years from the end of the relevant assessment year without satisfying the condition precedent specified in the first proviso to Section 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act‘) i.e. there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year.
The brief facts relevant for adjudication of the aforesaid legal issue are that the assessee is a Garnet Sand Exporter and during the year filed its return of income (RoI/ITR) on 25.09.2009 declaring total income at ₹44,24,420/-. The RoI was selected for scrutiny under CASS and the AO issued notices u/s.143(2) of the Act dated 19.08.2010, and notice u/s.142(1) of the Act dated 29.09.2011 and the assessee had participated in the original assessment proceedings, wherein, the AO asked the assessee inter-alia to give details of the deduction claimed by the assessee u/s.10B of the Act to the extent of ₹2,71,88,706/- of its Export Oriented Unit (EOU). And the assessee is noted to have furnished the details sought by the AO in respect of its EOU Unit as well as that of the other non-EOU Unit. The AO is noted to have verified the exemption claimed u/s.10B of the Act on the profits accrued from the EOU Unit and noted to have called for the financials of both the Units (EOU Unit & non- EOU Unit) and after examining the expenditure claimed by the assessee in respect of ‘mining lease expenses’ & bank charges, the AO is noted to have allowed only deduction u/s.10B of the Act at ₹2,58,09,970/- in respect of the assessee claim of ₹2,71,88,706/- and in that process, allocated expenditure of ₹13,78,736/- from non-EOU Unit to EOU Unit.
Thus, he reduced the profit of the EOU Unit by the said sum of ₹13,78,736/- and allowed the deduction at ₹2,58,09,970/- by framing the original assessment order u/s.143(3) of the Act on 23.12.2011.
Thereafter, the AO is noted to have issued notice u/s.148 of the Act on 05.12.2014 conveying his desire to reopen the assessment dated 23.12.2011 for AY 2009-10, which we note was an event after expiry of four (4) years from the end of the relevant assessment year and therefore, as rightly asserted by the Ld.AR, the proviso to Section 147 of the Act would come into play and hence, before the AO assumes the reopening jurisdiction, he (AO) has to satisfy the additional condition- precedent i.e. ‘the assessee failed to disclose fully and truly all material facts necessary for his assessment for that assessment year’ which is a jurisdictional fact essential for usurping the reopening jurisdiction for the relevant AY 2009-10. Here in this case, as noted supra the ITR of the assessee was earlier selected for scrutiny mainly for examining the claim of deduction u/s.10B of the Act for its EOU Unit of ₹2,71,88,706/- and expenditure incurred by the EOU Unit & non-EOU Unit. The AO is noted to have reduced the claim of the assessee u/s.10B of the Act at (AY 2009-10) Southern Enterprises :: 4 ::
₹2,58,09,970/- by passing the assessment order on 23.12.2011 u/s.143(3) of the Act; and after expiry of four (4) years from the end of the relevant assessment year, he (AO) has issued the notice u/s.148 of the Act on 05.12.2014 on the strength of the reasons recorded by him as given below:
The assessee, an exporter of garnet sand has shown the closing stock as follows:
Total EOU Non-EOU 1,25,78,500(100%) 1,13,15,250 12,57,250
The raw sand used during the year for the production of garnet sand is EOU (10B) Unit Non-EOU Unit Total 21465 MT (40%) 32215 MT (60%) 53680 MT (100%)
The assessee had used only 40% of raw sand minder during the year for 108 unit. In the closing stock of raw sand, the assessee had allocated 90% to the 10B unit and 10% to non 10B units. The improper allocation of closing stock increases the exempted income and decreases taxable income.
For 10B Unit 40% CS 50,29,000 (i.e. 40% of 12578500) For non-10B Unit 60% CS 75,43,500 (i.e.60% of 12578500) 1,25,72,500
Closing stock of Non-10B Units 75,43,500 Assessee already admitted (-) 12,57,250 62,86,250
Thus the amount of Rs.62,86,250/- which has escaped taxation has to be brought to tax.
From a perusal of the aforesaid reasons recorded on 10.11.2014 shows that the AO after going through the financials filed by the assessee for the relevant AY 2009-10, has noted that the assessee which is an exporter of Garnet-Sand has shown closing stock of EOU Unit at (AY 2009-10) Southern Enterprises :: 5 ::
1,13,15,250/- whereas the non-EOU Unit only reflects 12,57,250/- [total 1,25,72,500/-] and the raw-sand used during the year for production of garnet sand by the EOU Unit was to 21465 MT (40%) and non-EOU Unit was to 32215 MT (60%) [total 53680 MT (100%)]. Thus, according to the AO, the assessee had used 40% of raw-sand during the year for the 10B Unit, and has shown to have allocated raw-sand as closing-stock at 90% for the 10B Unit, whereas assessee has allocated only 10% to the non-10B Unit. Thus, according to the AO, such improper allocation of closing stock increased the exempted income of EOU Unit and consequently, decreased the taxable income. And thus, he was of the view that ₹62,86,250/- has escaped taxation.
The aforesaid reasons recorded by the AO for reopening the original assessment framed u/s.143(3) of the Act dated 23.12.2011 has been challenged on the legal issue, that the AO has not satisfied the additional condition precedent which is stipulated in the first proviso to Section 147 of the Act i.e. ‘the assessee failed to furnish fully and truly all material facts necessary for his assessment for that assessment year’. In this regard, we find that during the original assessment, the AO had picked up the ITR of the assessee for examining the veracity of the claim of deduction u/s.10B of the Act and as noted supra had reduced the claim from ₹2,71,88,706/- to ₹2,58,09,970/- by re-working the expenditure as noted supra. Moreover, it is noted the AO during the original assessment (AY 2009-10) Southern Enterprises order/proceedings had called for the financials of the EOU Unit as well as the non-EOU Unit, which fact the AO even acknowledges in the re- assessment order, (refer Para No.2 of his order dated 25.03.2016 wherein he observes that “the original assessment u/s.143(3) of the Act had been completed while taking into consideration the closing allocation purchased between the two Units. But, allocation of opening stock, usage of stock, allocation of closing stock are all based on the factual details and date which was furnished by the assessee”. Thus, we note that the assessee had furnished all the factual details regarding the claim of deduction u/s.10B of the Act in respect of EOU Unit including the allocation of opening stock, usage of stock allocation of closing stock which details included that of non-EOU Unit. In such a factual back ground, the AO couldn’t have reopened the assessment without pointing out in his reasons recorded what were the factual materials which were not disclosed by the assessee for the assessment for the relevant assessment year. Without spelling out the same in the reasons recorded, we are afraid the AO couldn’t have reopened the assessment. By not stating the failure on the part of assessee to furnish fully and truly all material facts necessary for his assessment for that assessment year, in his reasons recorded supra, we are of the view the AO failed to satisfy the additional condition precedent in order to successfully usurp the jurisdiction for reopening of assessment after expiry of four (4) years from the end of the (AY 2009-10) Southern Enterprises relevant assessment year. In this regard, we find that the Ld.CIT(A) erred in upholding the reopening by erroneously holding that reopening was an event within four (4) years from the end of the relevant assessment year, whereas as noted by us it was an event after four years from the end of the relevant assessment year; and also the Ld CIT(A) erred in making a finding that the AO was of the view that the factual details regarding closing stock were not furnished by the assessee at Para No.5.1.2 of his impugned order, instead the AO has acknowledged in the re-assessment order dated 25.03.2016 that the assessee had filed the details regarding the opening stock, closing stock, usage of stocks, etc., of the EOU Unit & non-EOU Unit during the original assessment u/s.143(3) of the Act dated 23.12.2011. Moreover, in the reasons recorded supra, the AO has not made a whisper about the failure on the part of the assessee not disclosing fully and truly all material facts necessary for his assessment for that assessment year which is sine-qua- non for reopening of assessment after expiry of four (4) years from the end of the relevant assessment year as the law as it stood at that period of time. Therefore, the assessee succeeds on the legal issue and the notice issued u/s.148 of the Act dated 05.12.2014 is quashed.
Consequently, the re-assessment order dated 25.03.2016 is held to be non-est in the eyes of law, and for such an action, we rely on the decision of the Hon’ble jurisdictional High Court in the case of ACIT v. Seshasayee Paper & Board Ltd., [2023] 148 taxmann.com 432 (Madras), wherein it was held as under:
From the above decisions, it is clear that existence of ''jurisdictional fact'' is sine qua non for the exercise of power. If the jurisdictional fact exists, only then the authority can proceed with the case and take an appropriate decision in accordance with law. It leaves no room for any doubt that to invoke the extended period, the Assessing Officer ought to show/demonstrate the existence of any of the three circumstances set out in the proviso to section 147 of the Act. In this case, failure on the part of the assessee to fully and truly disclose all material particulars in our view would constitute the "jurisdictional fact" for invoking extended period of limitation and failure to record the existence of the above jurisditional fact while invoking the extended period under the proviso to section 147 of the Act, would vitiate the entire proceedings. In this regard, it may be relevant to refer the following judgments, wherein it was held that failure to render a finding as to the existence of the above circumstance warranting invocation of the extended period in terms of the proviso to section 147 of the Act would vitiate the entire proceedings. In this regard, it may be relevant to refer to the following judgments:
(a) Duli Chand Singhania v. Asstt. CIT [2004] 136 Taxman 725/269 ITR 192 (Punj. & Har.):
''that the reasons recorded for issue of notice showed that the satisfaction recorded therein wes merely about the escapement of income. There was not even a whisper of an allegation that such escapement had occurred by reason of failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment. Absence of this finding which is a "sine qua non" for assuming jurisdiction under section 147 of the Act in a case falling under the proviso thereto, made the action taken by the Assessing Officer wholly without jurisdiction. The notice was not valid and was liable to be quashed. "
(emphasis Supplied)
(b) CIT v. Elgi Ultra Industries Ltd. [2008] 296 ITR 573 (Mad.)
"the reopening of the assessment under s. 148 beyond the period of four years at the end of the relevant assessment year can be sustained only if it is established that there is a failure on the part of the assessee to disclose fully and truly all material facts. in this case there is no finding that there is failure on the part of the assessee to disclose fully and truly all material facts".
(emphasis Supplied)
(c) CIT v. Premier Mills Ltd. [2009] 179 Taxman 13/[2008] 296 ITR 157 (Mad.)
"6. In case where the assessment is completed under section 143(3) of the Income-tax Act, the reopening of the assessment under section 148 beyond the period of four years at the end of the relevant assessment year can be sustained only if it is established that there is a failure on the part of the assessee to disclose fully and truly all material facts. In this case there is no finding that there is failure on the part of the assessee to disclose fully and (AY 2009-10) Southern Enterprises truly all material facts. Further, all the material facts are available at the time of making original assessment. The Tribunal has correctly followed the principles enunciated in the Supreme Court judgment reported in CIT v. Foramer France, [2003] 264 ITR 566, as well as this court judgment reported in the case of CIT v. Elgi Finance Ltd., [2006] 286 ITR 674 and came to the correct conclusion."
(Emphasis Supplied)
(d) CIT v. A.V. Thomas Exports Ltd. [2007] 163 Taxman 718/[2008] 296 ITR 603 (Mad.)
"6. The Tribunal has applied the correct principle of law and held as follows: "But whether recourse to section 147 could be made beyond four years is the real question in the present appeal. Circumstances for extending limitation beyond four years do not exist in the facts of the present case. As such on the ground of limitation assumption of jurisdiction under section 147 is bad. In the case of CIT v. Foramer France, [2003] 264 ITR 566 (SC), it was held that if there is no failure to file return or to disclose fully and truly all material facts, issuance of notice beyond the period of four years is barred by limitation. In the case of CIT v. Annamalai Finance Ltd., [2005] 275 ITR 451 (Mad) it was held that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceedings upon a mere change of opinion. It is incumbent on the Assessing Officer to prove that there was a failure to disclose material facts necessary for the assessment for the issuance of notice beyond the period of four years."
(e) Caprihans India Ltd. v. Tarun Seem, Dy. CIT [2003] 132 Taxman 123/[2004] 266 ITR 566 (Bom.)
"8. The Assessing Officer seeks to reopen the assessment after a period of four years from the end of the assessment year and in view of the judgment of this court in the case of IPCA Laboratories Ltd. v. Gajanand Meena, Deputy CIT (No. 2)[2001] 251 ITR 416, the Assessing Officer cannot act in the matter of reopening of assessment beyond four years, unless he has reason to believe that income has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. He submitted that a bare reading of the reasons shows that reopening is sought to be effected only on the basis of the case records. He submitted that on two out of three points mentioned in the reasons, the Assessing Officer merely states "that the issue needs to be looked into". That, on those two issues regarding subsidy and provident fund being disallowed, the Assessing Officer does not even say that there is escapement of income from assessment. He therefore submits that the proviso to section 147 is not attracted. That, on the said two points, there is nothing to indicate escapement of income. That, on the said two points, there is nothing to indicate failure on the part of the assessee to disclose fully and truly all material facts. That, on these two points, there is nothing to show as to on what basis the Assessing Officer has formed his belief regarding escapement of income from assessment. It is submitted that on the face of the given reasons, there is a total non-application of mind on the part of the Assessing Officer.
(Emphasis Supplied)
12.1 Secondly, when the view taken by the assessee is also the view taken by the Hon'ble Supreme Court, it would not be open to the Revenue to state that there is failure on the part of the assessee to fully and truly disclose all material particulars. Afortiori there is a legislative affirmation of the view taken (AY 2009-10) Southern Enterprises by the assessee by way of an amendment introduced to Section 115 JB of the Act with regard to the treatment to bad and doubtful debts whereby the above position of law declared by the Hon'ble Supreme Court was neutralized with retrospective effect from 1-4-2010. In this regard, it may be useful to refer to the following judgments: a. State of Rajasthan v. Jaipur Udyog Ltd. [1974] 3 SCC 247
"4. Assuming, without deciding, that the view taken by them is incorrect, even then it is impossible to say under the circumstances of the case that the Respondent was guilty of making any false representation. The view of the law, which he is contending for, is supported by the view taken by two Judges of the High Court and one Member of the Board of Revenue. Hence we fail to see how such a view of the law can be taken as false representation" b. Vodafone West Ltd. v. Asstt. CIT [2013] 33 taxmann.com 67/354 ITR 562 (Guj.)
The third reason is to be referred only for summary rejection. Third ground was retrospective amendment in section 115JB of the Act. Surely, beyond a period of four years this cannot be a ground for reassessment on assessment. Such legal proposition requires no authority of law. Nevertheless, we may refer to decision of Division Bench of this Court in case of Denish Industries Ltd. v. ITO [2004] 271 ITR 340/140 Taxman 456, wherein it was held and observed as under:
"It is true that when there is a statutory amendment with retrospective effect, the statutory amendment has to operate as if the law as amended was there on the statute book/However, as per the settled legal position the fiction is to operate within the field for which it is meant. Hence, if the proceedings were pending on 1st April, 1986 when the statutory amendment was made, whether assessment proceedings or proceedings by way of appeal or revision or reference, Expln. 8 would have certainly operated. However, on the question whether the assessee had failed to disclose fully and truly all material facts necessary for assessment, it is obvious that when the assessee had filed its return in 1983 it could not have assumed that such a legislative amendment was going to be made in the year 1986 with retrospective effect from the year 1974. In the facts of the present case, it could never be said by any stretch of imagination that in the year 1983 when the assessee filed return claiming investment allowance on the capitalisation of interest paid after the date on which the machinery was first installed and put to use, the assessee had failed to disclose all material facts. On the contrary, the assessee would have got the benefit of the entire interest amount for the post-installation period as revenue expenditure which would have been much higher than the amount of investment allowance and depreciation allowance taken together."
(emphasis Supplied)
In the circumstance, we agree with the finding of the learned Single Judge that the condition precedent to invoke extended period of limitation under section 147 of the Act viz., failure on the part of the respondent/assessee to disclose fully and truly all material particular is absent in the facts of the case.
13. In view of the above, the order of the learned Single Judge is affirmed as we find no reason to interfere with the same. The Writ Appeal stands dismissed. Consequently, connected Miscellaneous Petition is closed. No costs.
Durr India (P.) Ltd Vs Assistant Commissioner of Income Tax (OSD) - [2023] 152 taxmann.com 303 (Madras) "In fine, the order of the learned Single Judge with regard to the assessment year 2011-12 is set aside in view of the fact that the initiation of reassessment proceeding invoking the extended period of six years itself is bad in the absence of a finding as to the existence of the jurisdictional fact viz., that the escapement had occurred by reason of failure on the part of the assessee to disclose fully and truly all the material facts necessary"
Respectfully following the binding decision of the Hon’ble Madras High Court (supra), and other case laws supra, and in the absence of essential jurisdictional fact as noted supra the impugned action of AO to reopen after four years from the end of relevant assessment year is found to be wholly without jurisdiction, and hence we are inclined to quash the reopening notice issued by the AO and consequently, the reassessment order dated 25.03.2016 is held to be nullity in the eyes of law.
In the result, appeal filed by the assessee is allowed.
Order pronounced on the 04th day of February, 2026, in Chennai.