DCIT, NEW DELHI vs. M/S. JAI PARABOLIC SPRINGS LTD., NEW DELHI

O R D E R PER BENCH : This appeal is filed by the department against order dated 30.06.2014 passed by the Ld. CIT(Appeals)-VIII, New Delhi for assessment year 2006-07. In this appeal the department is challenging the deletion of addition of Rs. 6,11,69,969/- relating to prior period income. The C.O. has been filed by the assessee and it challenges the action of the Ld. CIT (A) in upholding the re- assessment proceedings initiated in the case of the assessee for the year under consideration.

2.1 Aggrieved, the assessee approached to Ld. CIT (A) and challenged the re-assessment proceedings by challenging the validity of the re-assessment proceedings and also by challenging the addition on merits. The Ld. CIT (A) dismissed the assessee legal ground challenging the validity of reassessment proceedings but deleted the addition on merits. Now, the department is before the ITAT and is challenging the deletion of addition by the Ld. CIT (A) whereas the assessee, through the CO, is challenging the action of the Ld. CIT (A) in upholding the validity of reassessment proceedings. The respective grounds raised by both the parties are as under:-

(Department’s Appeal): “Whether on the facts and circumstances of the case 1. & in law, the Ld. CIT(A) erred in deleting the addition of Rs. 6,11,69,969/- of prior period income” made by the A.O.?

That the order of the Ld. CIT(A) is erroneous and is 2. not tenable on facts and in law.

That the grounds of appeal are without prejudice to 3. each other.

That the appellant craves leave to add, alter, amend 4. or forgo any ground(s) of the appeal either before or at the time of hearing of the appeal.”

C.O. No. 189/Del/2017 (Assessee’s CO):

Reasons have been recorded on the basis of audit (i) objection and not on the basis of any fresh tangible material.

Reasons have been recorded merely on change of (ii) opinion which is not permissible under the law.

AO has not applied his mind so as to come to an (iii) independent satisfaction that he had reason to believe that income has escaped assessment as Reasons have been recorded on borrowed satisfaction without making any independent enquiries.

The reasons recorded indicate that the AO has acted (iv) on mere surmises and suspicion for making fishing and roving enquires. The requirement of law is “reason to believe” and not “reason to suspect”.

There is no nexus between the reasons recorded and (v) the escapement of income.

Reasons do not indicate any failure on the part of the (vi) Assessee to disclose fully and truly all material facts necessary for assessment which was originally completed u/s 143(3) of I.T. Act vide assessment order dated 16/12/2008.

That the Respondent Assessee reserves its right to add, 2. amend/modify the grounds of Cross Objections.”

assessment proceedings, the CO of the assessee should be taken up first. It was further submitted that if the assessee succeeds in its CO then the appeal of the department will become in fructuous. The Ld. Sr. DR had no objection to the request of the Ld. Authorized

Representative.

expenses of Rs. 57,70,528/- were dully reflected in the tax audit report attached with the return of income and, therefore, this information was already before the AO at the time of the original assessment proceedings. It was also submitted that the prior period income of Rs. 6,11,69,969/- included an amount of Rs.

5,69,80,980/- pertaining to deferred sales tax loan written back on the Net Present Value (NPV) and this fact was duly disclosed in the audited balance sheet for the year under consideration vide Note no. 20 under Schedule 19. Further, our attention was drawn to pages 31 and 32 of the paper book wherein this note had been reproduced. It was further submitted that this prior period income of Rs. 5,69,80,980/- pertaining to deferred sales tax loan was credited to the Profit & Loss A/c under the head ‘Prior Period

Adjustment’ below the line. The Ld. AR submitted that this was evident from the audited Profit & Loss A/c, a copy of which was placed in the Paper Book. The Ld. Authorised Representative further submitted that this income was accepted as non-taxable by the AO in the original assessment on order passed u/s 143(3) of the Act. The Ld. Authorised Representative argued that it was evident from the reasons recorded on the issue of prior period income that this information was already available in balance sheet as well as tax audit report furnished along with return of income and further details and documentary evidences regarding the same were also filed before the AO during the course of original assessment proceedings. It was submitted that there was no fresh tangible material which had come in possession of the Assessing Officer in this regard so as to justify the invocation of powers u/s 147 of the Act. The Ld. Authorised Representative also argued that the reasons for reopening were based on a mere change of opinion and, therefore, the re-assessment was bad in law and had been wrongly upheld by the Ld. CIT (A). Reliance was placed on the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Kelvinator of India Ltd. (Delhi) reported in 256 ITR 1 (Delhi) which was affirmed by the Hon’ble Apex Court and reported in 320 ITR 561 (SC) wherein the Hon’ble Apex Court had held that the AO has the power to reopen a completed assessment provided there is tangible material to come to the conclusion that there is escapement of income. Reliance was also placed on another judgment of the Hon’ble Delhi High Court in the case of CIT vs. Usha International

Ltd. reported in 348 ITR 485 for the proposition that assessment cannot be validly re-opened even within four years if the assessee had furnished full and true particulars at the time of the original assessment with reference to the income alleged to have escaped assessment if the original assessment was made u/s 143(3) of the Act. The Ld. Authorised Representative prayed that the C.O. of the assessee be allowed.

the action of the AO in resorting to re-assessment proceedings by relying on the findings of the Ld. CIT (A) in the impugned order wherein the Ld. CIT (A) had upheld the initiation of re-assessment proceedings.

“Assessment in this case was completed under section 143(3) at loss of Rs. 13,88,560/-. The scrutiny of assessment records revealed that as per 3CD report assessee had prior period income of Rs. 6,11,69,969/-. As the assessee company was following mercantile system of accounting, prior period income of Rs. 6,11,69,969/- should have been added back to the income fo th assessee. The mistake resulted in under assessment income of Rs. 5,97,81,409/- and incorrect carry forward loss of Rs. 13,88,560/- involving tax effect of Rs. 2,72,30,210/-. In view of the above, I have reasons to believe that the income of Rs. 6,11,69,969/- chargeable to tax has escaped assessment within the meaning of section 147/148 of the Income Tax Act, 1961.”

6.1 A perusal of the reasons, as reproduced in the preceding paragraph, shows that the only reason for initiating the re- assessment proceedings was the opinion of the AO that the prior period income of Rs. 6,11,69,969/- should have been added back to the income of the assessee and that by not doing so due to mistake there was an under assessment of income and incorrect carry forward of loss. The AO has also mentioned that this information was available in the Form 3CD report which had been filed for the assessee. We also note that in reply to a query raised by the AO, the assessee, in its submission dated 06.10.2008 in paragraph 6, had submitted before the AO that prior period expenses had not been claimed by the assessee company in its return of income and as the profit / loss for the year had been considered only before the claim of previous year expenses, no disallowance was needed in the assessment proceedings. This reply of the assessee is placed at pages 213 to 219 of the paper book. We also note that the prior period adjustment has also been disclosed by way of a Note to the audited balance sheet and the same appears at Sl. No. 20 in the notes on accounts attached to the balance sheet of the company.

This note reads as under:-

“The Company is entitled to defer its liability to pay Sales Tax in respect of its Chennai unit. During the year, the company has changed the method of accounting of sales tax defer liability from historical cost basis to Net Present Value basis. The liability under the scheme as on 31st March, 2006 on the basis of Net Present Value is Rs. 838.58 lacs (Previous Year Rs. 569.81 lacs) as per historical cost basis, as on 31st March, 2006 the liability aggregates to Rs.1612.56 lacs (Previous Year Rs.1148.57 lacs). On change in the method of accounting, the difference between the historical cost basis and Net Present Value method amounting to Rs.204.17 lacs for the year has been considered as other income and the difference between the historical cost basis and Net Present Value of Sales tax deferral liability accrued upto 31st March, 2005 amounting to Rs.569.81 lacs has been considered as prior period adjustments’’.

6.2 We also note that this Sales Tax Deferment is also disclosed in the computation of income of the assessee which was filed along with return of income. Thus, it is very much evident that all this information was before the AO at the time of the original assessment proceedings. Therefore, in view of the facts, it is our considered opinion that there was no fresh tangible material which had come in possession of the AO with regard to the prior period income so as to warrant initiation of reassessment proceedings in the case of the assessee. We hold that the reassessment was based on a mere change of opinion by the AO which, under law, he was not entitled to do. Admittedly, the reopening is within 4 years, however, the issue is squarely covered in favour of the assessee by the judgment of the Hon’ble Apex Court in the case of CIT vs. Kelvinator of India Ltd. reported in 320 ITR 561 (SC). The relevant observations of the Hon’ble Apex Court are as under:-

“On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1 st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to re-assess. But reassessment has to be based on fulfillment of certain pre- condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief’”.

6.3 Thus, the Hon’ble Apex Court has laid down that there is a complete difference between the power to review and power to reassess and, further, although, the AO has the power to reassess, he has no power to review. Similarly, The Hon’ble Delhi High Court in the case of CIT vs. Usha International Ltd. reported in 348 ITR 485 (Delhi) has also held that reopening will not be valid if the assessee has disclosed full and true particulars at the time of original assessment with reference to the income alleged to have escaped assessment if the original assessment was made u/s 143(3) of the Act. The relevant observations of the Hon’ble Delhi High Court are as under:-

“Assessment cannot be validly reopened under section 147 of the Act even within four years, if an assessee had furnished full and true particulars at the time of original assessment with reference to the income alleged to have escaped assessment, if the original assessment was made under section 143(3). So long as the assessee has furnished full and true particulars at the time of original assessment and so long as the assessment order is framed under section 143(3) of the Act, it matters little that the Assessing Officer did not ask any question or query with respect to one entry or note but had raised queries and questions in other aspects.”

6.4 Therefore, in view the ratio of the judgments of the Hon’ble Apex Court as well as the Hon’ble Delhi High Court, which is the Jurisdictional High Court for the assessee, and after due consideration of the factual matrix of the case, it is our considered opinion that the reopening was bad in law in view of no tangible material having come in possession of the AO subsequent to the original assessment proceedings and relating to the prior period income. Thus, it is a case of mere change of opinion by the AO which amounts to review of his earlier order and the same cannot be upheld. Therefore, the order of the Ld. CIT (A) is set aside and the reassessment proceedings u/s 147/148 of the Act are quashed as being void ab initio.

6.5 In view the reassessment proceedings being quashed, we do not deem it necessary to go into the merits of the addition as the same have become academic in nature.

(Order pronounced in the open court on 4th July, 2018).