D.C.I.T., CIRCLE-10, KOLKATA, KOLKATA vs. M/S VATICAN COMMERCIAL LTD., KOLKATA

Per Shri P.M. Jagtap, A.M..: This appeal is preferred by the Revenue against the order of ld. Commissioner of Income Tax (Appeals)-XII, Kolkata dated 13.08.2013.

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 2 of 12 income at ‘Nil’ and book profit of Rs.86,43,592/- under section 115JB of the Income Tax Act, 1961. Although the said return was initially processed by the Assessing Officer under section 143(1) on 09.05.2005, he subsequently reopened the assessment and issued a notice under section 148 after recording the reasons. In pursuance of the said notice, assessment was completed by the Assessing Officer under section 143(3)/147 of the Act vide an order dated 26.12.2008 determining the total income of the assessee at Rs.1,69,53,757/- after making additions on account of disallowance of provision for doubtful debts, disallowance of interest, disallowance under section 14A and addition on account of interest. Thereafter the assessment was again reopened by the Assessing Officer for the second time for the reasons that 15% share of the assessee from joint venture business amounting to Rs.52,93,587/- had escaped assessment. Accordingly, a notice under section 148 was issued by him on 26.05.2010, in reply to which a letter dated 28.06.2010 was filed by the assessee stating that the return filed originally on 11.10.2004 may be treated as the return filed in response to notice under section 148. During the course of second reassessment proceedings, it was submitted by the assessee that the speculation profit of Rs.52,93,587/- received from joint venture was already included in the total speculation profit of Rs.95,95,588/- offered filed by it in the return of income. This explanation of the assessee, however, was not found acceptable by the Assessing Officer as, according to him, it was not ascertainable as to whether the profit of Rs.52,93,587/- received from joint venture was included by the assessee in the speculation profit of Rs.95,95,588/-. He held that the entire speculation profit of Rs.3,52,71,950/- of the joint venture actually belonged to the assessee and accordingly the same was added by him to the total income of the assessee in the assessment completed under section 143(3)/147 vide an order dated 15.12.2011.

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 3 of 12 assessment as well as disputing the addition made by the Assessing Officer therein on account of entire speculation profit of the joint venture business. During the course of appellate proceedings before the ld. CIT(Appeals), detailed submission was made by the assessee in support of its case, which was forwarded by the ld. CIT(Appeals) to the Assessing Officer for the later’s comments. In the remand report submitted to the ld. CIT(Appeals), the Assessing Officer offered his comments on the written submission made by the assessee and after taking into consideration the same as well as the other material available on record, the ld. CIT(Appeals) found merit in the preliminary issued raised by the assessee challenging the validity of assessment made by the Assessing Officer under section 143(3)/147 and cancelled the same by holding it invalid in law for the following reasons given at pages 25 to 29 of his impugned order:- “As regards the re-assessment proceedings, it may be seen that the following twin conditions are to be satisfied for invoking provisions of sec. 147 of the Act-

Condition one:- The Assessing Officer must have reason to believe that income or profits or gains chargeable to income-tax had escaped assessment.

Condition two:- The Assessing Officer must also have reason to believe that such escapement had occurred by reason of either omission or failure on the part of the assessee to disclose fully and truly all material fac1s necessary for his assessment of that year or failure on the part of the assessee to make a return of income under section 139 or in response to notice issued under section 142(1) or 148.

When both these conditions should be satisfied to take action under sec. 147- Both these conditions should be satisfied if the original assessment was made under section 143(3)/147 and the Assessing Officer wants to take action after the expiry of 4 years from the end of the assessment year [proviso to section 147].

When only condition one should be satisfied to take action under section 147- in the following cases only condition one should be satisfied-

If the Assessing Officer wants to take action within 4 years (from the end of the assessment year) and the original assessment was completed under section 143(1), 143(3), 144; or

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 4 of 12 (b) If the Assessing Officer wants to take action after the expiry of 4 years (but not beyond 6 years) from the end of assessment year and the original assessment was completed under section 143( 1) or 144.

In case (a) and case (b] the Assessing Officer is free to initiate proceedings under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1)(a) had been issued - CIT v.Raiesh Jhaveri Stock Brokers (P)Ltd., [2007J 161 Taxman 316 (SC).

The appellant's case is covered by condition No.2. The re-assessment proceedings have been initiated after the expiry of four years. There is no fresh material brought on record to believe that escapement of income had occurred by reason of either omission or failure on the part of the appellant to disclose fully and truly all material facts necessary for his assessment of that year or failure on the part of the appellant to make a return of income under section 139 or in response to notice issued under section 142(1) or 148. It is well-settled law that oh assessment cannot be reopened only because of change of opinion. The mere change of opinion or wrong legal reference will not empower the Assessing Officer to reopen assessment- CIT v, Bhnji Lavji [l971J 79 ITR 582 (SC). Similarly, reassessment cannot be made on fresh opinion on the same facts - Sirpur Paper Mills Ltd. V. ITO [1978J 114 ITR 404 (AP) or in view of changed legal position - Maharaja Shri Umaid Mills Ltd. vs.- ITO (1962) 44 ITR 303 (Punj.). In Kamalchand v. ITO (1981) 128, ITR 290/ (l980J 4 Taxman 216 (MP), an assessment was sought to be reopened by the Assessing Officer on the ground that his predecessor-in office had committed on error in allowing certain deductions. The Madhya Pradesh High Court held that since no fresh information had come into possession of the Assessing Officer, the assessment could not be reopened. The Court held that if amounts only to change of opinion without anything else. Reassessment without any additional information amounts to change of opinion – Fluorescent Fixtures (P.) Ltd. V. ITO [2009] 34 SOT 48 (Mum). Similarly, where full facts and information regarding claim of depreciation at higher rate on commercial vehicles were furnished by the assessee and the Assessing Officer had consistently taken a view that higher depreciation was available, he could not re- open assessments subsequently under section 147 on mere change of opinion that higher depreciation was not available -Pressmen Advertising & Marketing Ltd. V. CIT [2005] 142 Taxman 17 (Kol.). Section 147 does not empower the Assessing Officer to review already concluded issues - CIT v. Ranji Kaur [2003] 81 TTJ (Chd) 269. Section 147 does not authorize the Assessing Officer to reopen assessment under garb of 'reason to believe' to review its own decision - CIT v. Smithkline Beecham Consumer Brands Ltd. [2003] 126 Taxman 104 (Chd.) (Mag.).

In Oil & Natural Gas Corpn. Ltd. V. CIT [2003] 133 Taxman 27 (Uttaranchal), it has been held that if the assessee has disclosed fully and truly all material facts necessary for purpose of assessment, an action under section 147 cannot be taken after expiry of 4 years from relevant assessment year on basis of mere change of opinion of the Assessing Officer that a larger sum ought to [have been disallowed under original assessment. "

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 5 of 12

The Allahabad High Court in J.P. Bajpai (HUF) v. CIT [2004] 140 Taxman 34 held that the responsibility of the assessee is limited to the disclosure of all primary facts and nothing beyond. Once the assessee has disclosed all the primary facts that is the end of his duty. It is then for the assessing authority to draw the proper conclusions from the facts. If the conclusions drawn by the Assessing Officer from the primary facts disclosed by the assessee are erroneous, the assessing authority cannot reopen the assessment merely on the basis of a change in opinion. A mere change in opinion would not confer jurisdiction upon the Assessing Officer to initiate proceeding under section 147. If, however, 'reason to believe' of the Assessing Officer is founded on an information which might have been received by the Assessing Officer after completion of assessment, it may be a sound foundation for exercising power under section 147, read with section 148 – CIT –vs.- Kelvinator of India Ltd. [2002] 123 Taxman 433 / 256 ITR 1 (Delhi) (FB). Moreover, there is nothing in section 147 to suggest that an Assessing Officer cannot reopen an assessment where he had failed to investigate and find out truth at initial stage - Ram Prasad v. ITO [1995] 82 Taxman 199 (All). However, the action under section 147 can be taken only on the basis of rules mentioned supra.

From the foregoing legal: propositions, it abundantly clear that an assessment completed under section 143(3) or 147 con be reopened after 4 years only if an income has escaped assessment because of an omission on the part of the assessee to disclose all material facts.

Now, in the present case, the Assessing Officer having examined the issue relating to the inclusion of share of joint venture profits in the profits declared in the original assessment and having not made any addition after being satisfied with the explanation of the appellant in the matter, had specifically expressed a view or opinion on the said issue and therefore , the reopening of the said assessment on the basis of the same issue without there being anything new brought on record clearly amounted to a mere change of opinion. The Assessing Officer has not brought on record any iota of evidence to justify his finding that 85% of the share profit attributable to joint venture partner, Mackertich Consultancy Services Pvt. Ltd., is assessable in the appellant's hands. Even the remand report is silent on the issue.

In view of the facts of the case and the emerging legal position, I am of the considered view that the initiation of reassessment proceedings in the present case by the Assessing Officer being merely on the basis of change of opinion was not permissible under sec. 147 read with section 148 of the Act and such the re-assessment proceedings are invalid”.

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 6 of 12 and truly all material facts necessary for its assessment for the year under consideration was specifically pointed out by the Assessing Officer in the reasons recorded. He contended that requirement of first proviso to section 147 thus was duly complied with by the Assessing Officer and the initiation of reassessment proceedings by him beyond the period of four years from the end of the relevant assessment year was in accordance with law. He also placed on record a copy of the confidential letter dated 09.11.2009 addressed to the ld. CIT, Kolkata-XI by Ld. CIT, Central-I, Kolkata pointing out that all the activities of the joint venture were being conducted by the assessee and the joint venture agreement was executed with an intention to divert the profits assessable in the hands of the assessee, a profit making concern, to the extent of 85% to MCS, which had incurred huge loss during the relevant year. He contended that this new information received by the Assessing Officer vide a letter dated 09.11.2009 after completion of the first assessment on 26.12.2008 was the basis of reopening of assessment for the second time and the ld. CIT(Appeals), therefore, was not justified in holding the assessment made by the Assessing Officer under section 143(3)/147 vide an order dated 15.12.2011 as invalid on the ground that the reopening was based on a mere change of opinion. He contended that there was thus no legal infirmity in the order of the Assessing Officer passed under section 143(3)/147 as alleged by the ld. CIT(Appeals) and there is no justification in the action of the ld. CIT(Appeals) in cancelling the said assessment by treating the same as bad-in-law.

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 7 of 12 reported in 268 ITR 332. He once again invited our attention to the reasons recorded by the Assessing Officer and pointed out that the assessment was reopened by the Assessing Officer to bring to tax the income of Rs.52,93,587/- being 15% of the profit of joint venture business as the same, according to the Assessing Officer, had escaped assessment. In this regard, he invited our attention to the written submission dated December 10, 2008 filed before the Assessing Officer during the course of original reassessment proceedings to show that a specific query was raised by the Assessing Officer in this regard and while replying the same, it was categorically submitted by the assessee that the speculation profit of Rs.95,95,588/- declared by it was inclusive of a profit of Rs.52,93,587/- being 15% of the profit from joint venture. He contended that there was thus no failure on the part of the assessee to disclose fully and truly the relevant information or material as allegedly pointed out by the ld. D.R. from the reasons recorded by the Assessing Officer and the reopening of assessment after the expiry of four years was barred by limitation as per the first proviso to section 147. The ld. counsel for the assessee thus strongly supported the impugned order of the ld. CIT(Appeals) cancelling the assessment made by the Assessing Officer under section 143(3)/147 by holding the same to be invalid and urged that the same may be upheld on this issue.

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 8 of 12 01.07.2003. The profit of the joint venture “Vatican Machertich JV’ from August 2003 to March, 2004 was for Rs.3,52,71,950/-. The share of M/s. MCS Ltd. and Vatican Commercial Ltd. is in the ratio of 85% and 15%, hence their share of profit comes to Rs.2,99,78,363/- and Rs.52,93,587/- respectively. These are also a related parties.

Computation and the balance sheet of the assessee co. are examined to find as to whether the income of Rs.52,93,587/- (i.e. 15% share of the J.V.) has been disclosed as income or not. But no such income are found disclosed.

M/s. MCS Ltd. and the joint venture “M/s. Vatican Machertich JV” are a related party as per Act, hence necessary information w.r.t. investment/transaction was required to be furnished in the “Notes forming part of the audited accounts”. The same was examined vide Sch. 17(5) and noticed the comment of the Auditor-

“Disclosure as required by Accounting Standard 18 (AS-18) ‘Related Party Disclosures’ issued by the Institute of Chartered Accountants of India are as follows:-

Names of the related parties and description of relationship: Key Management Personnel: Anand Krishna Martin (Director) Sanjay Kumar Thard (Director Pawan Kumar Goel (Director)

There were no transactions between the company and the aforesaid related parties during the year.

The above facts conclusively proves that total income of Rs.52,93,587/- i.e. 15% of the J.V. earning as per agreement (supra) have not been disclosed by the assessee company which has escaped assessment and to tax the same proposal for re-opening the assessment for A.Y. 2004-05 is submitted”.

A perusal of the reasons recorded by the Assessing Officer shows that the assessment originally completed under section 143(3)/147 vide an order dated 26.12.2008 was reopened by the Assessing Officer to bring to tax the income of Rs.52,93,587/- representing share of profit of 15% of the assessee from joint venture, which according to the Assessing Officer had escaped assessment as a result of the failure of the assessee to disclose the same. In this regard, the ld. counsel for the assessee has relied on the submissions made in writing by the assessee vide letter dated 10.12.2008 filed by the assessee before the Assessing Officer during the course of the first re-assessment proceedings, wherein it was submitted by the

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 9 of 12 assessee in reply to a specific query raised by the Assessing Officer that it had earned a speculation profit of Rs.95,95,588/-, which was inclusive of a profit of Rs.52,93,587/- being 15% of the profit from joint venture with MCS. It was also clarified by the assessee that all these transactions inclusive of 15% of Rs.3,52,71,950/- being profit from joint venture business were shown as speculation profit in the Profit & Loss Account. Keeping in view these submissions made by the assessee in writing categorically during the course of first re-assessment proceedings, we find that there was no failure on the part of the assessee to fully and truly disclose its share of profit of 15% from joint venture as alleged by the Assessing Officer in the reasons recorded and initiation of reassessment proceedings by him after the completion of four years from the end of the assessment year under consideration was not valid as per the first proviso to section 147.

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 10 of 12 escapement of income of the assessee only to the extent of Rs.52,93,587/- being the share of profit of 15% of the joint venture earning. The entire income of the joint venture was considered by the Assessing Officer in the hands of the assessee only in the assessment finally completed under section 143(3)/147 while the reasons recorded by him for reopening confined only to the share of profit of 15% of the assessee of the joint venture, which was alleged to have escaped assessment. It is thus difficult to accept the contention of the ld. D.R. that the letter dated 09.11.2009 was available on record before the Assessing Officer at the relevant time and the same formed the basis of reopening of assessment. In any case, there was no reference whatsoever to the said letter in the reasons recorded by the Assessing Officer as rightly pointed out by the ld. counsel for the assessee. In the case of Hindustan Lever Limited –vs- ACIT & Others (supra) cited by the ld. counsel for the assessee, Hon’ble Bombay High Court has held that the reasons recorded by the Assessing Officer are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him and he has to speak through his reasons. The reasons are the manifestation of the mind of the Assessing Officer and the same should be self-explanatory and should not keep the assessee guessing for the reasons. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons such material relied upon by him so as to establish the vital link between the reasons and evidence. It was held that such vital link is the safe guard against arbitrary reopening of the concluded assessment and the reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit, or making an oral submission. Keeping in view the decision of the Hon’ble Bombay High Court in the case of Hindustan Lever Limited (supra) and having perused the reasons recorded by the Assessing Officer, which clearly show that there is no new information or material which has been referred to or relied upon by the Assessing Officer to reopen the assessment, we fully agree with the ld. CIT(Appeals)

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 11 of 12 that the reopening of assessment made by the Assessing Officer was based on a mere change of opinion, which is not permissible in law. We, therefore, uphold the impugned order of the ld. CIT(Appeals) cancelling the assessment made by the Assessing Officer under section 143(3)/147 of the Act by treating the same as invalid and dismiss Ground No. 1 of the Revenue’s appeal. 9. Keeping in view our decision rendered above on the preliminary issue raised in Ground No. 1 upholding the impugned order of the ld. CIT(Appeals), whereby he cancelled the assessment order made by the Assessing Officer under section 143(3)/147, the other grounds raised in the appeal of the Revenue relating to the addition made on account of joint venture profit on merit have become infructuous and the same are accordingly dismissed.

I.T.A. No. 2623/KOL./2013 Assessment Year: 2004-2005 Page 12 of 12

Copies to : (1) Deputy Commissioner of Income Tax, Circle-10, Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, 3 rd Floor, Kolkata-700 069

(2) M/s. Vatican Commercial Limited, Vaibhav, 4, Lee Road, Kolkata-700 020

(3) Commissioner of Income Tax (Appeals)-XII, Kolkata

(4) Commissioner of Income Tax ,Kolkata (5) The Departmental Representative (6) Guard File By order

Senior Private Secretary, Head of Office/DDO Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.