SCHNEIDER ELECTRIC INDIA (P) LTD.,GURGAON vs. DCIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘G’: NEW DELHI BEFORE SH. I.C. SUDHIR, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 4386/Del/2010 & 5185/Del/2013 Assessment Year: 2002-03 M/s. Schneider Electric India (P.) Vs. Deputy Commissioner of Income No., 9th Floor, Tower C, DLF Tax, Circle-7(1), New Delhi Building 10, DLF Cyber City, Phase-II, Gurgaon GIR/PAN : AABCS1624G (Appellant) (Respondent) Appellant by Dr. Rakesh Gupta & Sh. Somil Aggarwal, Advocates Respondent by Smt. Anima Barnwal, Sr. DR Date of hearing 11.04.2016 Date of pronouncement 31.05.2016 ORDER PER O.P. KANT, A.M.: These two appeals of the assessee are directed against two separate orders of the learned Commissioner of Income-tax(Appeals) dated 26/08/2010 and 10/07/2013 for assessment year 2002-03, one in respect of assessment made under section 143 (3) of the Income-tax Act, 1961 (for short “the Act”) and another in respect of penalty levied under section 271(1)(c) of the Act. Both the appeals being inter-connected, are heard together and disposed of by this consolidated order. ITA No. 4386/Del/2010 for A.Y.: 2002-03 2. First we take up, the appeal in ITA No. 4386/Del/2010. The grounds of appeal raised by the assessee are as under: 1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in confirming

2 ITA No. 4386/Del/2010 & 5185/Del/2013 reopening of assessment after expiry of four years, as the original assessment was completed u/s 143(3) & there is no finding by the AO that there was any failure, on the part of the appellant , to disclose fully and truly all material facts necessary for its assessment. 2. On the facts and circumstances of the case, the Ld. CIT (A) has erred in confirming addition of an amount of Rs. 3,65,55,313/- in respect of the provision of following expenses made in the accounts by treating these as ccontingent in nature, where as these are ascertained liabilities:- - Provision for employee liability Rs. 19,33,000/- - Provision for employee incentive Rs. 39,97,701 /- - Provision for distributor incentive Rs. 3,06,24,612/- Moreover, the amounts were duly reflected in the details submitted before the AO during the assessment proceedings u/s 143(3), hence the addition has been made on change of opinion. 3. On the facts and circumstances of the case, the learned CIT(A) has erred in confirming addition of an amount of Rs. 13,61,951/- by notionally charging interest of 15% on amounts advanced during normal course of business. Moreover, the details were on records, at the time of assessment u/s 143(3), hence the addition has been made on change of opinion. 4. On the facts and circumstances of the case, the Learned CIT (A) has erred in confirming addition of an amount of Rs.82,28,960 /- u/s 201 (1 Ad of the I T Act for non deduction of TDS amounting to Rs. 86,16,713/-, on payment of incentive to distributors. Moreover, the details were on records, at the time of assessment u/s 143(3), hence the addition has been made on change of opinion. 5. On the facts and circumstances of the case, the Ld. CIT (A) has erred in confirming addition on account of excess depreciation allowed earlier on computer accessories. Moreover, the details were on records, at the time of assessment u/s 143(3), hence the addition has been made on change of opinion. The above grounds of appeal are without prejudice to one another. The appellant craves leave to add, avoid, forgo or alter any of the aforesaid Grounds of Appeal if it becomes necessary to do so in the interest of justice, at or before the time of hearing of the aforesaid appeal.

3 ITA No. 4386/Del/2010 & 5185/Del/2013 2. The assessee did not charge proportionate interest of Rs. 13,61,195/- on advances of Rs. 90,79,679/- to employees and intra group companies out of the interest bearing loans. 3. The assessee did not deduct tax at source (TDS) while paying incentive distributors of Rs. 86,16,713/- and failure to deduct TDS attracted interest liability of Rs. 82,28,960/- under section 201(1A) of the Act. 4. Depreciation at the rate of 60% was claimed on computer accessories rather than depreciation at the rate of 25% allowable, resulting into under assessment of Rs. 7,25,447/- 4. In view of above observations, the Assessing Officer had reason to believe that the taxable income of Rs. 4,85,53,424/- had escaped assessment within the meaning of section 147 of the Act and after recording reasons to believe, he issued notice under section 148 of the Act on 25/03/2009. Though the assessee requested to treat the return filed earlier as return in response to the notice under section 148 of the Act but objected the reopening of the assessment being beyond four years from the relevant assessment year and without any failure on the part of the assessee in disclosing all the materials fact fully and truly. The objections of the assessee were rejected by the AO and the reassessment was completed after making additions on the issues raised in the reasons recorded. Aggrieved, the assessee filed appeal before the learned Commissioner of Income-tax (Appeals) and raised legal grounds challenging the reassessment proceedings as well as challenged the additions on merit. The learned Commissioner of Income-tax(Appeals), however, upheld the reassessment proceedings but allowed part relief on the addition in respect of depreciation on computer accessory. Aggrieved, the assessee is in appeal before the Tribunal.

4 ITA No. 4386/Del/2010 & 5185/Del/2013 material facts necessary for the assessment, whereas, no such failure has been noticed by the Assessing Officer in the case of assessee and, therefore, the reopening of the assessment was not justified in the case of the assessee. The assessee has also raised the issue of change of opinion by the Assessing Officer on the material already considered during the assessment proceedings under section 143(3) of the Act. 6. Before us, the ld. Authorized Representative of the assessee referring to page 127 of the paper book, which is a copy of a letter issued by the Assessing Officer to the assessee communicating the reasons recorded for reopening of the assessment, submitted that the reopening of the assessment was bad in law due to following reasons: 1. There was no fresh material for reopening of the assessment, much less the tangible material. In support of the proposition, the ld AR relied on the judgement of the Hon’ble Delhi High Court in the case of Orient craft Ltd reported in 354 ITR 536 (Delhi), Madhukar Khosla reported in 367 ITR 165(Delhi), and Mohan Gupta HUF 365 ITR 115 (Delhi ) 2. The notice under section 148 of the Act was issued on 25/03/ 2009, which is beyond the four years from the end of the relevant assessment year and therefore according to the proviso to the section 147 of the Act , no reassessment could be made unless there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment and in the reasons to believe the Assessing Officer has nowhere recorded any failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment. 3. Notice under section 148 of the Act was issued after satisfaction and sanction from the joint Commissioner of income tax whereas as per law, it should have been issued after satisfaction and sanction of the Commissioner of income tax. In support thereof they are relied on the judgement of the Delhi High Court reported in 345 ITR 220 in the case of SPL Siddhartha. 4. Reopening of the assessment was made on the basis of the audit objection , which was not accepted by the Assessing Officer. He referred to page 129 to 131 of the assessee’s paper book, which is copy of a letter written by the Assessing Officer to the Audit officer. In support of the proposition, the ld. AR relied on the judgement of the Supreme Court in the case reported in 109 ITR 996 and judgement of the Gujarat High Court in the case reported in 281 ITR 593 (Guj).

5 ITA No. 4386/Del/2010 & 5185/Del/2013 7. On the contrary, the ld. Sr. Departmental Representative (Sr. DR) relying on the authorities below submitted that the reopening was done in accordance to the law and the circulars issued by the CBDT on the issue of audit objection. 8. We have heard the rival submissions and perused the material on record including the orders of the authorities below. First we take up the legal propositions of the Authorized Representative that in the case of the assessee there was no fresh material, much less the tangible material for forming reason to believe to reopen the assessment and therefore in view of the judgment cited by the ld. AR, the reassessment in absence of any fresh material was invalid and bad in law. In the case of Orient craft Ltd (supra), the Hon’ble Delhi High Court has laid down as under:

“13. 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(1) 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; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(1). Therefore it is not permissible to adopt different standards while interpreting the words "reason to believe" vis-a-vis Section 143(1) and Section 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made under Section 143(3) cannot apply where only an intimation was issued earlier under Section 143(1). It would in effect place an assessee in whose case the return was processed under Section 143(1) in a more vulnerable position than an assessee in whose case there was a full- fledged scrutiny assessment made under Section 143(3). Whether the return is put to scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of proving valid reasons to believe could be circumvented by first

6 ITA No. 4386/Del/2010 & 5185/Del/2013 accepting the return under Section 143(1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression "reason to believe" in cases where assessments were framed earlier under Section 143(3) and cases where mere intimations were issued earlier under Section 143(1) may well lead to such an unintended mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed. 14. Certain observations made in the decision of Rajesh Jhaveri (supra) are sought to be relied upon by the revenue to point out the difference between an "assessment" and an "intimation". The context in which those observations were made has to be kept in mind. They were made to point out that where an "intimation" is issued under section 143(1) there is no opportunity to the assessing authority to form an opinion and therefore when its finality is sought to be disturbed by issuing a notice under section 148, the proceedings cannot be challenged on the ground of "change of opinion". It was not opined by the Supreme Court that the strict requirements of section 147 can be compromised. On the contrary, from the observations (quoted by us earlier) it would appear clear that the court reiterated that "so long as the ingredients of section 147 are fulfilled" an intimation issued under section 143(1) can be subjected to proceedings for reopening. The court also emphasized that the only requirement for disturbing the finality of an intimation is that the assessing officer should have "reason to believe" that income chargeable to tax has escaped assessment. In our opinion, the said expression should apply to an intimation in the same manner and subject to the same interpretation as it would have applied to an assessment made under section 143(3). The argument of the revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri (supra) would also appear to be self- defeating, because if an "intimation" is not an "assessment" then it can never be subjected to section 147 proceedings, for, that section covers only an "assessment" and we wonder if the revenue would be prepared to concede that position. It is nobody’s case that an "intimation" cannot be subjected to section 147 proceedings; all that is contended by the assessee, and quite rightly, is that if the revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. In other words, the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under section 143(3) and another applicable where an intimation was earlier issued under section 143(1). It follows that it is open to the assessee to contend that notwithstanding that the argument of

7 ITA No. 4386/Del/2010 & 5185/Del/2013 "change of opinion" is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the assessee to challenge the reasons recorded under section 148(2) on the ground that they do not meet the standards set in the various judicial pronouncements. 15. In the present case the reasons disclose that the Assessing Officer reached the belief that there was escapement of income "on going through the return of income" filed by the assessee after he accepted the return under Section 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer, both strongly deprecated by the Supreme Court in CIT vs. Kelvinator (supra). The reasons recorded by the AssessingOfficer in the present case do confirm our apprehension about the harm that a less strict interpretation of the words "reason to believe" vis-a-vis an intimation issued under section 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of the power conferred under section 147.” 9. Thus, without any tangible material which came in the possession of the Assessing Officer, the reassessment proceedings have been held by the Hon’ble court as arbitrary exercise of the powers conferred under section 147 of the Act and, accordingly, the reassessment proceedings have been held as invalid. 10. Further, in the case of Madhukar Khosla (supra) the Hon’ble Delhi High Court has held as under: “11. The foundation of the AO’s jurisdiction and the raison d’etre of a reassessment notice are the “reasons to believe”. Now this should have a relation or a link with an objective fact, in the form of information or facts external to the materials on the record. Such external facts or material constitute the driver, or the key which enables the authority to legitimately re-open the completed assessment. In absence of this objective “trigger”, the AO does not possess jurisdiction to reopen the assessment. It is at the next stage that the question, whether the re-opening of assessment amounts to “review” or “change of opinion” arises. In other words, if there are no “reasons to believe” based on new, “tangible materials”, then the reopening amounts to an impermissible review. Here, there is nothing to show what triggered the issuance of notice of reassessment – no information or new facts which led the AO to believe that full

8 ITA No. 4386/Del/2010 & 5185/Del/2013 disclosure had not been made. The impugned notice, the AO’s order rejecting the objections, and the arguments of the Revenue nowhere indicate how the AO was impelled to seek re-opening of the assessee’s case, as distinguished from the several other completed assessments.” 11. Thus, again the Hon’ble High Court has emphasized on the requirement of tangible material for reopening of the assessment and in absence of such material the reopening has been held to be review or change of opinion which is not permissible in the law.

“9. In this case, the record does not show any tangible material that created the reason to believe that income had escaped. Rather, the reassessment proceedings amount to a review or change of opinion carried out in the earlier A.Y. 2005-06, which amounts to an abuse of power and is impermissible. Equally, even the order of the Assessing Officer for the A.Y. 2007-08, converting the STCG into business income, has been reversed by the CIT (Appeals) in Appeal No. 114/09-10, which was confirmed by Income Tax Appellate Tribunal, Delhi, in ITA No. 1923 (Del) of 2010.” 13. In the background of the above judgments, when we examine the facts of the case in hand, we find that the assessment was reopened without any fresh material coming into the possession of the Assessing Officer, which is apparent from the reasons recorded by the Assessing Officer, which are reproduced as under:

“The reasons for re-opening the assessment u/s 147 of the IT Act, 1961 as recorded are as under: 1. On perusal of records, it reveals that the under mentioned provisions were made. Provision for employee liabilities 32,24,000/- Provision for employee incentive 39,97,701/- Provision for distributor incentive 3,06,24,612/-

9 ITA No. 4386/Del/2010 & 5185/Del/2013 Total 3,78,46,313/- As the aforesaid provision were contingent in nature and not ascertained, these should have been disallowed. Omission to this, resulted in under assessment of income by Rs. 3,78,46,313/- involving tax effect Rs. 1,89,49,511/-. 2. The company has interest bearing loan and has paid Rs. 6,31,56,365/- as interest. However, the company did not charged interest on payment of Rs. 51,64,054/-towards employees loan and Rs. 39,15,625/- towards sundry advances. An addition of Rs. 13,61,951/-, which is 50% of interest free loan advanced amounting to Rs. 90,79,679/- should have been made in the taxable income of the assessee. This mistake resulted in short levy of tax of Rs. 6,81,910/- including interest. 3. The assessee had not deducted TDS, while paying incentives to distributors amounting to Rs. 86,16,713/-. Failure to deduct TDS attracts payment of interest amounting to Rs. 40,06,771/- under section 201 (IA) of the IT Act, 1961. 4. The computer accessories mentioned in the computation sheet have been grouped under the block ‘computer’ instead of under the block ‘plant and machinery ’ and depreciation has been allowed @ 60% Instead of 25% resulting in excess claim of depreciation. The short levy of tax including interest work out to Rs. 1,05,480/ on amount of Rs. 7,25,447/-. In view of above, I have therefore, reason to believe that an amount of Rs. 4,85,53,424/- has escaped assessment within the meaning of section 147(b) of the IT Act, 1961.” 14. Thus, respectfully following the above judgments of the Hon’ble Delhi High Court, we are of the opinion that in absence of any fresh material , particularly when the assessment was completed under section 143(3) of the Act, reopening of the assessment was not valid and it amounts to change of opinion based on the same material which was available during assessment proceedings, therefore, we held the re-assessment proceedings under section 147 of the Act as invalid.

10 ITA No. 4386/Del/2010 & 5185/Del/2013 16. In the result, the appeal of the assessee is allowed.

ITA No. 5185/Del/2013 for 2002-03

11 ITA No. 4386/Del/2010 & 5185/Del/2013 18. Having heard the rival parties and perused the material on record, we find that the re-assessment proceedings in which the additions were made, has already been held as invalid in ITA No. 4386/Del/2010, the penalty levied under section 271(1)(c) of the Act on those very additions, cannot survive and, accordingly, we allow the grounds No. 1 to 6 of the appeal.

The decision is pronounced in the open court on 31st May, 2016.

Sd/- Sd/- (I.C. SUDHIR) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 31st May, 2016. Laptop/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi