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Income Tax Appellate Tribunal, DELHI BENCHES : D : NEW DELHI
Before: SHRI R.S. SYAL & MS SUCHITRA KAMBLE
ORDER PER R.S. SYAL, AM:
These two appeals by the Revenue relate to A.Ys. 2002-03 and 2003-04. Since common issues are raised in these appeals, we are, therefore, proceeding to dispose them by this consolidated order for the sake of convenience.
Assessment Year 2002-03
The first ground taken by the Revenue is against the direction of the ld. CIT(A) in quashing the assessment by holding that the initiation of re-assessment proceedings was void ab initio.
Briefly stated, the facts of this ground are that the assessee filed its return on 29.1.2002 declaring total income of Rs.27.01 crore under the normal provisions of the Income-tax Act, 1961 (hereinafter also called `the Act’) and book-profit of Rs.62.71 crore u/s 115JB of the Act. Such return was revised on 26.2.2013 declaring total income of Rs.26.71 crore under the normal provisions and the same amount as earlier declared u/s 115JB of the Act. The case was selected for scrutiny and the assessment order was passed u/s 143(3) on 28.2.2005 assessing the total income at Rs.26.71 crore under the normal provisions and Rs.64.39 crore u/s 115JB of the Act. Thereafter, notice u/s 148 was issued which was served upon the assessee on 24.7.2008 on the ground that ‘Prior period 2 expenses’ amounting to Rs.1,32,81,705/- were claimed by the assessee which were not deductible. The assessment was completed u/s 147 read with section 143(3) determining total income at Rs.28.54 crore. The assessee challenged the initiation of reassessment before the ld. CIT(A), who held such proceedings to be void ab initio, inter alia, on the ground that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment in terms of proviso to section 147. The Revenue is aggrieved against the quashing of the reassessment.
We have heard the rival submissions and perused the relevant material on record. It has been noticed above that the assessment was originally completed u/s 143(3) of the Act and notice u/s 148 was served upon the assessee on 24.7.2008. The assessment year under consideration is 2002-03. Admittedly, this notice u/s 148 was issued beyond a period of four years from the end of the relevant assessment year. Proviso to section 147, which is material for our purpose, reads as under :-
`Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:’
A bare perusal of this proviso, to the extent it is applicable to the factual scenario under consideration, indicates that where an assessment was made u/s 143(3), no action shall be taken u/s 147 after the expiry of four years from the end of the relevant assessment year unless an income chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. This indicates that in the absence of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, no action u/s 147 can be taken after the expiry of four years from the end of the relevant assessment year where the original assessment was completed u/s 143(3) of the Act.
At this juncture, it is relevant to note the reasons recorded by the AO which have been reproduced at page 2 of the assessment order, as under:-
"M/s. Telecommunications Consultant India Ltd. assessed to tax with Circle- 16(1), New Delhi had filed its return of income for AY 2002-03 on 29.12.2002 declaring an income of Rs. 27,01,13,370/- under normal provisions of the Act, and Book profit of Rs. 62,71,26,625/- under section 115JB. The revised return was filed by the assessee on 26.02.2003 declaring an income of Rs.26,71,33,870/- under normal provisions of the Act and Book profit of Rs.62,71,26,625 u/s 115JB which was processed u/s. 143(1) on 21.02.2003. The case was also done under section 143(3) and on order passed on 28.02.2005. After going through the case records and 3 CD report, the assessee has debited Rs. 1,32,81,705/- to P&L Account on account of prior period expenses. As the assessee was following mercantile system of accounting, the expenses which were not relevant to previous year were required to be disallowed. Therefore, I have reason to believe that the income of the assessee has been under-assessed by 1,32,81,705/- involving short levy of tax of Rs.47,41,569/-.
A careful perusal of the reasons recorded by the AO divulges that in his opinion there was an under-assessment of income by Rs.1.32 crore on account of the assessee debiting the Prior period expenses to its Profit & Loss Account as was revealed from the Audit Report in Form No. 3CD. It clearly emerges from the above that the assessee debited a sum of Rs.1.32 crore in its Profit & Loss Account which became the 5 subject matter of notice u/s 148. We find that apart from debiting this amount to the Profit & Loss Account, the assessee also appended item no. 19 in the Notes to Accounts forming part of the annual financial statements, reading as under:-
Sl.No. Description 2001-02 1. INCOME Project/Other Income 1,53,11,981 1,53,11,981 2. EXPENSES (a) Stores & Spares and Loose Tools Consumed 22,27,547 (b) Sub Contractor 3,56,801 (c) Employee Remuneration & Benefits 19,26,916 (d) Other Expenses 87,70,441 TOTAL-II 1,32,81,705 NET ADJUSTMENT(I-II) 20,30,276 3. Extra Ordinary Income (War claim from UNO) 3,19,22,221
It is, thus, manifest from the above item no.19 in the Notes to Accounts that the assessee computed Prior period expenses at Rs.1,32,81,705/-, which were claimed as deduction in the Profit & Loss Account. Further, as the AO has himself recorded in the reasons that Audit Report in Form No.3CD revealed that the assessee claimed deduction for Prior period expenses to this extent. In view of the above disclosures made by the assessee in its return of income and the accompanying documents, question arises as to whether such disclosure can be termed as a full and true disclosure of all material facts necessary for the assessment. The ld. DR strongly relied on the judgment of the Hon’ble Delhi High Court in the case of Honda Siel Power Products Ltd. vs. DCIT (2012) 340 ITR 53 (Del) in which the notice issued after the expiry of four years from the end of the relevant assessment year containing reasons to believe that the assessee did not offer any disallowance of expenses in respect of exempt income has been held to have been rightly issued. The ld. DR further submitted that the SLP filed against this judgment has been dismissed by the Hon’ble Supreme Court in (2012) 340 ITR 64 (SC). When we look at the facts and circumstances as prevailing in the case of Honda Siel Power Products Ltd. (supra), it becomes patent that the assessee in that case earned tax free dividend income exempt u/s 10(33) and did not offer any disallowance u/s 14A of the Act. The Hon’ble High Court, upholding the initiation of reassessment proceedings, held that the term ‘failure’ on the part of the assessee is not restricted only to the return or tax audit 7 report, but also covers the stage of assessment proceedings. The Hon’ble High Court further held that it includes omission and failure on the part of the assessee to disclose fully and truly material facts during the course of assessment proceedings. Thus, it is clear that the Hon’ble High Court upheld the initiation of reassessment proceedings when the assessee did not offer any disallowance u/s 14A of the Act which ought to have been done. Au contraire, we find that there is a significant difference in the factual scenario obtaining in the instant case. The assessee in question claimed deduction for Prior period expenses in the Profit & Loss Account; indicated the calculation by means of item no. 19 in Notes to Accounts; and also mentioned this fact in the Audit Report in Form No.3CD. In contrast, the assessee in Honda Siel Power Products Ltd. (supra) did not work out any disallowance of expenses in terms of section 14A, far away from disclosing the same in the return of income or other accompanying documents. That being the position, the judgment in the case of Honda Siel Power Products Ltd. (supra) is distinguishable on facts. We further find that the Hon’ble Delhi High Court in NTPC Ltd. vs. DCIT (2014) 360 ITR 380 (Del) and CIT vs. 8 Indian Farmers Fertilizers Co.(2008) 171 Taxmann 379 (Del) has held that the issuance of notice u/s 148 for reopening of assessment as unjustified where the assessee made true and full disclosure of all particulars necessary for his assessment. In view of the above discussion, it is clear that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment in terms of deduction for Prior period expenses. This legal issue being covered by the aforenoted two judgments of the Hon’ble Delhi High Court, is hereby held to have been rightly decided by the ld. CIT(A) in assessee’s favour.
The ld. CIT(A) gave one more cogent reason for quashing the reassessment. This reason was that the reasons recorded by the AO did not talk of failure of the assessee to disclose such material facts leading to under-statement of income. This, in his opinion, was also sufficient for setting aside the assessment. In reaching this conclusion, he relied on the judgment of the Hon’ble Bombay High Court in Hindustan Lever Ltd. vs. R.V. Wadkar, ACIT, (2004) 268 ITR 363 (Bom). Countering this judgment, the ld. DR relied on the judgment of the Hon’ble Gujarat High Court in I.P. Patel & Co. vs. DCIT (2012) 346 ITR 247 (Guj) in which it has been held that the notice need not specify instances of failure and it was sufficient if the failure on the part of the assessee could be inferred.
Having heard the rival submissions and perused the relevant material on record, we find that the Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. (supra), has categorically held that where a notice is issued after expiry of four years, the reasons recorded by the AO must state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. It is true that the Hon’ble Gujarat High Court in I.P. Patel & Co. (supra), has held that it was sufficient if such failure could be inferred.
Notwithstanding the above position, we find that there is a direct judgment of the Hon’ble jurisdictional High Court in Haryana Acrylic Manufacturing Co. vs. CIT and Another (2009) 308 ITR 38 (Del) in which it has been held that: “in the reasons supplied to the Petitioner, there is no whisper, what to speak of allegation that the Petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been an escapement of income chargeable to tax.” It is on this ground that the Hon’ble High Court set aside the proceedings flowing from notice u/s 148 issued after four years from the end of the relevant assessment year. When we consider the above extracted reasons recorded by the AO in juxtaposition to the judgment in the case of Haryana Acrylic Manufacturing Co. (supra), it becomes overt that there is no allegation by the AO in the reasons that there was escapement of income chargeable to tax because of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In our considered opinion, the ld. CIT(A) was justified in quashing the assessment on this score as well. This ground is, therefore, not allowed.
In view of the fact that the initiation of reassessment proceedings itself has been set aside, there is no need to deal with the grounds on merits.
Assessment Year 2003-04
For this year also, the AO initiated reassessment proceedings after a period of four years from the end of the relevant assessment year having originally completed u/s 143(3) of the Act. The assessment was reopened by recording the following reasons:-
"M/s. Telecommunications Consultant India Pvt, Ltd. assessed to tax with Circle- 16(1), New Delhi had filed its return of income for AY 2003-04 on 28.11.2003 declaring an income of Rs. 24,99,14,140/- under normal provisions of the Act, and Book profit of Rs. 51,35,90,223/- under section 115JB which was processed u/s. 143(1) on 17.06.2005. The case was also done under section 143(3) and on order passed on 30.12.2005. After going through the case records and 3 CD report, the assessee has debited Rs. 594.2 lakhs to P&L Account on account of prior period expenses. As the assessee was following mercantile system of accounting, the expenses which were not relevant to previous year were required to be disallowed. Therefore, I have reason to believe that the income of the assessee has been under-assessed by Rs. 594.25 lakhs involving short levy of tax of Rs. 293.18 lakhs. After going through the case records and 3 CD report, the assessee has debited prior period expenditure of Rs. 57.53 lakhs in the profit and loss account under the head ‘’Employees remuneration and benefits and other expenses". As the expenses relates to prior period, same should have been disallowed. Therefore, I have reason to believe that the income of the assessee has been under-assessed by Rs. 57.53 lakhs involving short levy of tax Rs.28.38 lakhs.
After going through the case records and 3 CD audit report, the assessee has made Provision for warranty period expenses of Rs.155.51 lakhs in P & L Account. As the amount was merely a provision, it should have been added back. The mistake resulted in under assessment in income of Rs.155.51 lakhs involving tax effect of Rs. 76.72 including interest. Therefore, considering the above grounds, I have reason to believe that the income of the assessee has been under-assessed by Rs. 807.29 1akhs and tax effect of Rs.398.28."
The ld. CIT(A) quashed the assessment by following the reasoning given by him in his order for the A.Y. 2002-03, which we have approved hereinabove.
Apart from the item of Prior period expenses, the AO, in the reasons for reassessment, has also taken one more item, being Provision for warranty period expenses amounting to Rs.1.55 crore, which ought to have been disallowed. This item also appeared in the Audit Report in Form No. 3CD. We find that the reasoning given by us for the immediately preceding year in approving the setting aside of the initiation of reassessment on account of `Prior period expenses’ which were disclosed by the assessee in its Profit & Loss Account and also promptly reported in Tax Audit Report, applies with full force in so far as additional issue of Provision for warranty period expense of Rs.1.55 crore is concerned. This item was also reported in Form No. 3CD.
Without making any fresh submissions, both the sides have adopted the arguments advanced by them for the immediately preceding assessment year, which we have dealt with above. Following the view taken for the A.Y. 2002-03, we approve the action of the ld. CIT(A) in quashing the reassessment for this year as well.
Here, again, there is no need to dispose of the grounds on merits because of the upholding of the setting aside of the initiation of re- assessment proceedings.
In the result, both the appeals are dismissed.
The order pronounced in the open court on 21.10.2016.