Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, B/“SMC” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal is filed by the assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-5, Chennai dated 20.07.2017 pertaining to assessment year 2010-11.
The assessee has raised the following grounds for adjudication.
1. The order of The Commissioner of Income Tax (Appeals) 5, Chennai dated 20.07.2017 in l.T.A.No.76/CIT(A)-5/2016-17 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The CIT (Appeals) erred in confirming the re-assessment while rejecting the plea of change of opinion theory without assigning proper reasons and justification and ought to have appreciated that the order of re-assessment was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
3. The CIT (Appeals) failed to appreciate that the change of opinion as evident from para 8 of the original assessment order dated 8.3.2013 read with the re-assessment order on the issue of the presumption of GP would vitiate the re-assessment on various facets.
4. The CIT (Appeals) failed to appreciate that the lack of tangible materials would also constitute another valid ground to substantiate the grounds challenging the validity of re-assessment.
5. The CIT (Appeals) erred in sustaining the addition of `6,25,3561- on the presumption of escapement of income in the determination of gross profit without assigning proper reasons and justification.
6. The CIT (Appeals) failed to appreciate that the presumption of inflation in gross profit was wholly unjustified and ought to have appreciated that the stock transfer and the subsequent stock journal entry coupled with the explanation with respect to the reduction in market value would negate such presumption of inflation. 7. The CIT (Appeals) failed to appreciate that the addition of `6,25,3561- was wrong, erroneous, unjustified, incorrect and not sustainable in law.
8. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.
2.1 (i) Ground Nos.1 to 4 is relating to reopening of assessment .
(ii) Ground Nos.5 to 7 is relating to sustaining the addition by Ld.CIT(A) on the ground of escapement of income in the determination of gross profit.
(iii) Ground No.8 is relating to proper opportunity not given to assessee by Ld.CIT(A).
The brief facts of the case are that the assessee is an individual, engaged in the business of Retailers & wholesalers of Gift articles. The case was selected for scrutiny under CASS and the assessment completed on 08.03.2013 determining the taxable income as ` 30,38,030/-. Notice u/s.148 was issued to the assessee on 27.03.2015 and the assessment was reopened for the following reasons:-
“For difference in Gross profit, the assessee had submitted the following reconciliation statement:-
Gross Profit as per Stock Summary Statement 85,96,390.28 LESS: A. Inflation of GP in the stock summary statement 8,06,642.44 due to stock journal Vourcher as per Annexure B. Omission in the closing stock due to Nil Realizable value 9,43,982.93 C. Reduction in market value of Stock items with Respect. to Average cost as per Annexure 6,25,356.51 23,75,981.88 Gross profit as per Trading Account 62,20,408 The assessee’s explanation regarding “A” and “C” above has been accepted without assigning any reason. At ‘C’ above, the assessee has himself computed the difference in the valuation of the closing stock items at cost or market price whichever is lower.”
Accordingly, the AO was of the opinion that the sum of `6,25,356/- was not disclosed by the assessee and hence, the amount `6,25,356/- was added to the G.P. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A). On appeal, the Ld.CIT(A) confirmed the action of the ld. Assessing Officer. Against the order of Ld.CIT(A), now the assessee is in appeal before us.
Before us, ld.A.R submitted that the original assessment in this case was completed u/s.143(3) of the Act vide order dated 08.03.2013. Subsequently, the assessment was reopened by recording the reasons mentioned hereinabove i.e. to consider the valuation of closing stock on account of G.P rates. He submitted that at the time of original assessment from the soft copy of accounts produced by the assessee in the form of tally, the stock summary was extracted. The ld. Assessing Officer has compared it with the P&L a/c produced by the assessee. There was re-conciliation of the gross profit with stock summary statement and trading account. The ld.A.R drew our attention to the page-2 &3, 4 & 5 of the original assessment order dated 08.03.2017 and also he submitted that there was an addition of ` 9,43,982/- towards gross profit due to difference in stock summary. Thus, he submitted that, the re-opening of assessment u/s.147 on the same materials/records for the purpose of bringing the GP additions on account of discrepancy in G.P rate due to difference in stock summary is bad in law. Further, the ld.A.R submitted that there should be some outside material, which could be said to have come to the knowledge of the ld. Assessing Officer after the original assessment was completed. He submitted that this is the case of mere change of opinion on the basis of same set of facts. He drew our attention to the following judgments of the jurisdictional High Court. a) In the case of Karti P. Chidambaram Vs. ACIT in W.P. No.1589 of 2017 dt.13.11.17.
b) In the case of Jayanthi Natarajan Vs. ACIT in W.P. No.1905 of 2017 dt.14.09.17 c) in the case of M/s.TANMAC India Vs. DCIT in Tax case (Appeal)
No.1426 of 2007 vide order dated 19.12.2016 wherein held that Department cannot be permitted to avail all the extended time limit in the absence of any new or tangible material, when the time for scrutiny assessment had elapsed, prior to the issue of impugned notice u/s.148 of the Act.
On the other hand, ld.D.R submitted that in the assessee’s case, it was opened within 4 years from the end of relevant to assessment
year. As per the provisions of section 147, it is only in a case where a scrutiny assessment was earlier made, the AO is barred from reopening assessment unless income chargeable to tax escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment in the original return or during the earlier proceedings.
He submitted that as per Explanation (1) to section 147, merely producing a document from which material evidence could have been gathered by the AO with due diligence, will not necessarily amount to full and true disclosure. The assessee might have produced the details during the course of assessment proceedings but the AO failed to draw correct conclusion that too be the reason to reopen the assessment.
We have heard both the parties and perused the material on record. The main contention of the ld.A.R is that the assessment herein was originally completed u/s.143(3) of the Act, so that the assessment can be re-opened u/s.147 of the Act subject to fulfillment of conditions precedent, which include the condition that the AO must have “reason to believe” that income chargeable to tax is escaped assessment. It is true that the original assessment order was passed u/s.143(3) of the Act. The AO cannot disturb the finality of the original assessment passed u/s.143(3) of the Act at his whims and caprice; he must have reason to believe within the meaning of sec.147 of the Act. The scope and effect of sec.147 of the Act substituted with effect from 01.04.1989, as also Sections 148 to 152 are substantially different from the provisions as they stood prior to substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied: firstly, the Assessing Officer must have reason to believe that income, profits or gains chargeable to Income-tax have escaped assessment, and, secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a).
But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.
6.1 As seen from the above, the finality of the assessment passed u/s.143(3) of the Act can be disturbed by initiating the re- assessment proceedings only “so long as the ingredients of sec.147 are fulfilled” and there should be reason to believe that the income chargeable to tax has escaped assessment and it does not matter that there has been no failure or omission on the part of the assessee to disclose full and true particulars at the time of the original assessment. There is nothing in the language of section 147 to unshackle the Assessing Officer from the need to show "reason to believe". When section 147 was recast with effect from April 1, 1989, the Legislature sought to replace the expression "reason to believe" with the expression "for reasons to be recorded by him in writing". But there were representations against the proposal and bowing to them the original expression was restored. This aspect of the matter has been brought out by the Supreme Court in the case of CIT v.
Kelvinator in 320 ITR 561 as follows:-
"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 reopen. 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 reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of 'change of opinion' is removed, as contended on behalf of the Depart ment, then, in the garb of reopening 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 . . . Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words 'reason to believe' but also inserted the word 'opinion' in section 147 of the Act. However, on receipt of representations from the companies against omission of the words 'reason to believe', Parlia ment reintroduced the said expression and deleted the word 'opinion' on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549, dated October 31, 1989 ([1990] 182 ITR (St.) 1, 29), which reads as follows : '7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression "reason to believe" in section 147. A number of representations were received against the omission of the words "reason to believe" from section 147 and their substitution by the "opinion" of the Assessing Officer. It was pointed out that the meaning of the expression, "reason to believe" had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression "has reason to believe" in place of the words "for reasons to be recorded by him in writing, is of the opinion". Other provisions of the new section 147, however, remain the same'."
6.2 It would be appropriate at this juncture to take a brief survey of a few decisions of the Supreme Court which have infused meaning and content to the expression "reason to believe" appearing in section 147.
6.3 A Constitution Bench of the Supreme Court in A. N.
Lakshman Shenoy v. ITO [1958] 34 ITR 275 (SC), speaking through S. K. Das J held that an assessment cannot be reopened on the basis of a mere guess, gossip or rumour. This was in the context of the pre-1948 law relating to reassessment under which the Assessing Officer was empowered to reopen the assessment on the basis of "definite information". Though this judgment is based on the phraseology of section 34 of the 1922 Act as it existed before 1948 which did not contain the expression "reason to believe", that principle was adopted by the Supreme Court while dealing with section 34 of the Act after the amendment made in 1948. In that year, the words "definite information" were replaced by the words "reason to believe". While expatiating on the new words, a three-judge Bench of the Supreme Court, speaking through V. Ramaswami J., in S.Narayanappa v. CIT [1967] 63 ITR 219 (SC), opined as under (page 222) :
"Again, the expression 'reason to believe' in section 34 of the Income- tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it different, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law (see Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC))."
In Sheo Nath Singh v. AAC of I. T. [1971] 82 ITR 147 (SC) 6.4 the Supreme Court (Hegde J.) observed as under (page 153) :
"There can be no manner of doubt that the words 'reason to believe' suggest that the belief must be that of an honest and rea sonable person based upon reasonable grounds and that the Income- tax Officer may act on direct or circumstances evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the condi tions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court."
6.5 It was further observed that the reasons themselves cannot be stated to be beliefs, which would be an obvious self-contradiction.
6.6 The entire law as to what would constitute "reason to believe" was summed up by H. R. Khanna J., speaking for the Supreme Court in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC). The following principles were laiddown :
"(a) The powers of the Assessing Officer to reopen an assessment, though wide, are not plenary. (b) The words of the statute are 'reason to believe' and not 'reason to suspect'. (c) The reopening of an assessment after the lapse of many years is a serious matter. Since the finality of a judicial or quasi-judicial proceedings are sought to be disturbed, it is essential that before taking action to reopen the assessment, the requirements of the law should be satisfied.
(d) The reasons to believe must have a material bearing on the question on escapement of income. It does not mean a purely subjec tive satisfaction of the assessing authority ; the reason be held in good faith and cannot merely be a pretence. (e) The reasons to believe must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation is belief regarding escapement of income. (f) The fact that the words 'definite information' which were there in section 34 of the Act of 1922 before 1948, are not there in section 147 of the 1961 Act would not lead to the conclusion that action can now be taken for reopening an assessment even if the information is wholly vague, indefinite, far-fetched or remote."
6.7 In CIT v. Kelvinator India Ltd.(320 ITR 561) the Supreme Court observed as under (page 564) :
"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 reopen. 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 reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of 'change of opinion' is removed, as contended on behalf of the Depart ment, then, in the garb of reopening 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."
It was also observed that after April 1, 1989, the Assessing Officer has power to reopen provided there is "tangible material" to come to the conclusion that there is escapement of income. This judgment has laid emphasis on two more aspects: that there can be no review of an assessment in the guise of reopening and that a bare review without any tangible material would amount to abuse of the power.
6.8 Having regard to the judicial interpretation placed upon the expression "reason to believe", and the continued use of that expression right from 1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation under section 143(3) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in section 147.
In the present case, the reasons disclosed that the AO reached the belief that there was an escapement of income on verification of the documents, which were already on record, and it was seen that gross profit rate declared by the assessee is very low.
Hence, the AO have a reason to believe that income chargeable to tax has escaped assessment within the ambit of section 147 of the Act and the case was re-opened. A notice u/s.148 was served on the assessee on 27.03.2011. There was no whisper that the AO came to know this from any tangible fresh material, which came to his possession after conclusion of original assessment so that there was an escapement of income. This is nothing but a review of the earlier proceedings and an abuse of power by the ld. Assessing Officer, both strongly deprecated by the Supreme Court in the case of CIT Vs. Kelvivator (supra).
7.1 The reasons recorded by the AO in the present case do confirm our apprehension about the harm that a less strict interpretation of the words “reason to believe” vis-à-vis and order u/s.143(3) and cast to the tax regime. Since there was no whisper in the reasons recorded of any tangible material, which came to possession of the AO, subsequent to the order passed u/s.143(3) of the Act. It reflects an arbitrary exercise of the power conferred u/s.147 of the Act. At this stage, it is pertinent to mention that there was a cleavage of opinion even to consider the G.P. rate as the basis for determining the income of assessee.
7.2 In our opinion, when there was a cleavage of opinion to consider G.P rate to determine the taxable income of assessee while framing the original assessment itself, how the AO could use the same documents, which were already on record to re-open the assessment, which was concluded u/s.143(3) of the Act.
7.3 Thus, in our view, on the basis of above said facts, it can be concluded that the present provisions of the section 147 of the Act does not enable the AO to exercise his jurisdiction for reopening the concluded assessment, without any tangible fresh materials. In that view of the matter, it is not appropriate on the part of the AO to jump to a conclusion only on the basis of value low G.P rate to reopen the assessment , when the same documents which were already brought on record at the time of original assessment, he failed to take a cognizance of that documents and framed the original assessment .
We are well aware that it is neither necessary nor mandatory that at the time of recording of reasons itself, the AO should come to a conclusion that there will be option of escaped assessment as per reason recorded. The only requirement in law is, the AO prima facie must have a reason to believe on the basis of material in his possession, that income is escaped assessment . In facts of the present case, the AO completed the original assessment on the basis of records available with him and there was no allegation by the AO that assessee has not disclosed correct profit in the return filed for the assessment year or detail of G.P was not available before the AO when the assessment was framed u/s.143(3) of the Act.
Undoubtedly, the information on the basis of which assessment was reopened, which was already in the possession of the AO and it was not subsequently came to his possession after the completion of the original assessment so as to reveal understatement of the sale value. In such circumstances, the AO is not empowered under the Act to reopen the assessment.
7.4 The ld.D.R made a plea before us that production before Assessing Officer of books of accounts or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the first proviso to sec.147 of the Act. We find that this situation has been considered by the full Bench of the Delhi High Court in its judgment in the case of CIT Vs. Kelvinator India Ltd.(256 ITR 1) and the full Bench observed that:-
"The said submission is fallacious. An order of assessment can be passed either in terms of sub-s. (1) of s. 143 or sub-s. (3) of s.
When a regular order of assessment is passed in terms of the said sub-s. (3) of s. 143, a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of cl. (e) of s. 114 of the Indian Evidence Act, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong."
7.5 It is clear from the observations made above that the Full Bench of the Delhi High Court has taken a view that in a situation where according to the AO he failed to apply his mind to the relevant material in making the assessment order, he cannot take advantage of his own wrong and reopen the assessment by taking recourse to the provisions of s. 147. We find ourself in respectful agreement with the view taken by the Full Bench of the Delhi High Court.
7.6 It is further to be seen that the legislature has not conferred power on the AO to review its own order. Therefore, the power under s. 147 cannot be used to review the order. In the present case, though the AO has used the phrase "reason to believe", admittedly between the date of the order of assessment sought to be reopened and the date of formation of opinion by the AO, nothing new has happened, therefore, no new material has come on record, no new information has been received; it is merely a fresh application of mind by the same AO to the same set of facts and the reason that has been given is that the some material which was available on record while assessment order was made was inadvertently excluded from consideration. This will, in our opinion, amount to opening of the assessment merely because there is change of opinion. The Full Bench of the Delhi High Court in its judgment in the case of Kelvinator (supra) referred to above, has taken a clear view that reopening of assessment under s. 147 merely because there is a change of opinion cannot be allowed. In our opinion, therefore, in the present case also, it was not permissible for Assessing Officer to issue notice under s. 148.
7.7 Further, in the case of CIT Vs. Ashley Services Ltd. in [2014] 369 ITR 209 (Mad) wherein held that reading of the reasons given for reopening of assessment shows that it was nothing but a review of the orders passed u/s.143(3) of the Act relating to the assessment years 1996-97 & 1997-98. Consequently, even though the assessment was re-opened, then a limitation period of 4 years there being no fresh material to disturb the reasoning arrived at reopening of assessment was unsustainable.
7.8 In the case of Dishman Pharmaceuticals And Chemicals Ltd. Vs. DCIT in [2012] 346 ITR 245 (Guj) held that the reasons for reopening of assessment did not make out any case of escapement of income from assessment on account of the assessee not disclosing fully and truly all material facts necessary for the same.
Quiet apart from the fact that no such suggestion is recorded in the reasons, independently also there is no finding that the AO’s stand in the reasons recorded , can in any manner be construed as suggesting that the income escapement on account of the assessee not disclosing the material facts.
7.9 In the case of Debashis Moulik Vs. ACIT in [2015] 370 ITR 660 (Cal) held that escapement of income could not be used to reopen an assessment on facts, information, documents which were before the AO or could have been easily found by him while making the assessment.
If we go through the above judgements, all the documents relating to the assessee on computation of income for the subject assessment year were before the AO. There is no allegation by the AO that the document relied for recording reasons were not at all before the AO, therefore, it cannot be said that there was “escapement of income” or that the reasons for believing that there was “escapement of income” were valid. The AO cannot say that yesterday he was ignorant, and he is wise today as all the materials are available before him, when he was framing original assessment u/s.143(3) of the Act. If he failed to take a view on the subject, the same documents should not be used to reopen the assessment as it was before him and he could have been easily found by him while framing the assessment. He cannot himself use the same documents to reopen the concluded assessment, which is nothing but abuse of law.