DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE, MADURAI vs. M/S RAMCO SYSTEMS LIMITED, RAJAPALAYAM

आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by Revenue against the order of the

Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in

short "the Ld.CIT(A)”), Delhi, dated 18.09.2023 for the Assessment Year

(hereinafter in short "AY”) 2009-10.

Ld.CIT(A) quashing the re-opening of assessment after expiry of four (4)

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 2 ::

years from the end of the relevant Assessment Year on the ground that

the condition precedent as stipulated under the first proviso to sec.147 of

the Income Tax Act, 1961 (hereinafter in short "the Act”) has not been

satisfied.

income (RoI) on 29.09.2009 returning taxable business loss of

Rs.61,82,61,888/-, long-term capital gain of Rs.63,34,32,074/- and term

capital gain of Rs.27,00,000/- resulting in net capital gain of

Rs.1,78,70,186/- and which was set off against the total available carried

forward depreciation from AYs 2000-01 to 2008-09 amounting to

Rs.33,55,50,604/-. Assessment u/s.143(3) of the Act was completed on

28.11.2011 making additions resulting in total income of

Rs.36,43,61,360/- [without considering the carried forward business loss

or unabsorbed depreciation]. Against the aforesaid action of AO, assessee

which filed appeal before Ld.CIT(A). And simultaneously, the assessee

filed a petition u/s.154 of the Act dated 19.12.2011 to correct mistake in

computing the total income and for consideration of the carried forward

unabsorbed depreciation for adjustment against the total income for the

year. Order u/s.154 of the Act dated 22.02.2012 was passed by the AO

re-computing the total income Rs.38,32,31,502/- by accepting the claim

and the AO adjusted the unabsorbed depreciation of Rs.33,55,50,604/-,

and determined net taxable income at Rs.4,76,80,938/-. Thereafter, the

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 3 ::

AO issued (suo moto) notice u/s.154 of the Act dated 02.08.2012

proposing the deletion of setoff of unabsorbed depreciation to the extent

of Rs.2,80,14,345/- pertaining to AYs 2000-01 & 2001-02. Pursuant

thereto, the assessee filed reply dated 04.09.2012 objecting the said

proposal as not warranted by law and the AO didn’t pursue the proposed

withdrawal of accumulated depreciation adjustment. Thereafter, the

Ld.CIT(A), Madurai passed two Appellate orders dated 30.12.2015 in [ITA

No. 294/2011-12] which was partially allowed & [ITA No.4/2012-13] was

fully allowed. The AO on 13.07.2016 gave effect to Ld.CIT(A)'s order re-

computing the total income of Rs.5,49,93,391/- and adjusted/setoff

unabsorbed depreciation to such extent, resulting NIL taxable income.

30.03.2016 by taking note that the assessee company had set off

unabsorbed depreciation loss related to AY 2000-01 of Rs.1,22,19,604/-

with current business income and unabsorbed depreciation loss related to

AY 2001-02 of Rs.1,57,94,741/- against Long Term Capital Gain.

According to the AO, prior to 1/4/2002, unabsorbed depreciation loss,

when carried forward, was eligible for set off only against business income

and not against any other head of income. And that the carry forward was

also restricted to eight assessment years succeeding the assessment year

in which the depreciation was first computed. Hence, the set off of

unabsorbed depreciation for AY 2000-01 of Rs.1,22,19,604/- beyond

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 4 ::

eight years and the unabsorbed depreciation for AY 2001-02 of

Rs.1,57,94,741/- against long term capital gain was not correct. And

thereafter, Re-Assessment Order u/s.143(3)/147 of the Act was passed

on 30.12.2016, disallowing Rs.2,80,14,345/- and thus determined the

income of assessee at Rs.2,80,14,345/-.

wherein the assessee raised the legal issue challenging the jurisdiction of

the AO to have re-opened the assessment admittedly after four (4) years

from the end of relevant Assessment Year without satisfying the

conditions precedent as provided under the first proviso to sec.147 of the

Act i.e. without satisfying that the assessee has failed to disclose fully and

truly all material facts for which assessment was being re-opened; let us

have a look at the relevant provisions of Law u/s.147 of the Act which

reads as under:

Income escaping assessment.

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

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 5 ::

disclose fully and truly all material facts necessary for his assessment, for that assessment year:

[Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.]

(emphasis supplied)

And on such plea/legal issue, the Ld.CIT(A) has noted the relevant fact

necessary to adjudicate by taking note that the original scrutiny

assessment for AY 2009-10 was passed u/s.143(3) of the Act on

28.11.2011 and that the impugned notice u/s.148 of the Act was issued

by the AO on 30.03.2016 which event was found by Ld CIT(A) to be after

expiry of four years from the end of the relevant Assessment Year; and

thus, he correctly found that in this case, in order to usurp reopening

jurisdiction, the AO had to satisfy the additional condition prescribed

under the first proviso to sec.147 of the Act in addition to recording the

reason to believe escapement of income. Having agreed with the Ld

CIT(A) as noted, we note that the Ld.CIT(A) thereafter has rightly

examined the reasons recorded by the AO to re-open which he has

reproduced at Para No.6.3 of the impugned First Appellate order which is

noted as under:

"The assessee-company is engaged in business of software development and resale of computer software and hardware and filed its return of income for A.Y.2009-10 on 29.09.2009 admitting a total Income of Rs.Nil. The return was processed u/s 143(1) on 18.10.2010. Subsequently the case selected for scrutiny and 143(3) was completed on 28.11.2011 with assessed income of Rs.36,43,61,356/-.

Prior to 1st April 2002, unabsorbed depreciation loss when carried forward were eligible for set off only against business income and not against any other head of

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 6 ::

income. The carry forward time is also restricted to eight assessment years succeeding the assessment year in which it was first computed. While going through the return of income, the assessee has not done so. The assessee company set off unabsorbed depreciation loss related to Asst. Year 2000-01 of Rs.1,22,19,604/- with current business income and incorrect set off unabsorbed depreciation loss related to A.Y.2001-02 of Rs.1,57,94,741/- with long term capital gain. In order to assess/examine the same in the hands of the assessee, this case may be reopened." 6. A reading of the reasons recorded by the AO to justify re-opening is

noted to be regarding allowability of unabsorbed depreciation pertaining

to AY 2000-01 & 2001-02 to be set-off against income of AY 2009-10.

However, it is noted that the AO in the reasons recorded (supra) has not

alleged the assessee’s failure to disclose fully & truly materials facts

necessary for assessment of that year i.e, AY 2009-10 [refer first proviso

to section 147 of the Act supra]. Having noted the crucial omission on

the part of the AO while recording reason to re-open the assessment, we

proceed further to note that the Ld.CIT(A) found that the scrutiny

assessment u/s.143(3) of the Act was framed by order dated 28.11.2011

and the AO had determined the total income of Rs.36,43,61,360/- without

considering any carry forward business loss or unabsorbed depreciation.

Aggrieved, the assessee filed petition u/s.154 of the Act dated

19.12.2011 requesting the AO for set off unabsorbed depreciation against

the total income assessed. Thereafter, the AO passed order u/s.154 of

the Act on 22.02.2012 re-computing the total income at

Rs.38,32,31,502/- and adjusting unabsorbed depreciation of

Rs.33,55,50,604/-. The Ld.CIT(A) also found that the unabsorbed-

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 7 ::

depreciation of Rs.33,55,50,604/- includes the unabsorbed depreciation of

Rs.1,22,19,604/- pertaining to AY 2000-01 and Rs.1,57,94,741/-

pertaining to AY 2001-02. The Ld.CIT(A) also noted that thereafter the AO suo-moto issued notice u/s.154 on 02.08.2012 wherein he proposed

to rectify the set off of the unabsorbed depreciation of Rs.1,22,19,604/-

pertaining to AY 2000-01 [being beyond the time limit of eight years] and

Rs.1,57,94,741/- pertaining to AY 2001-02 [for being set off against

income other than business income] which exercise we note that the AO

dropped after being satisfied by the reply of the assessee. In such factual

back ground, the Ld.CIT(A) found that the fact regarding unabsorbed

depreciation of AY 2000-01 & AY 2001-02 being allowed as set off against

the assessed income of AY 2009-10 was already on record while

impugned notice u/s.148 was issued on 30.03.2016. Thus, according to

the Ld.CIT(A) the issue regarding unabsorbed depreciation being already

available before the AO as visible from the assessment records, it can’t be

said that there was any failure on the part of the assessee in disclosing

fully and truly all material facts necessary for his assessment. Therefore,

the Ld.CIT(A) rightly held that the condition precedent given in first

proviso to sec.147 of the Act is not satisfied in the facts and

circumstances of this case. In the light of the discussion and considering

the relevant facts, we concur with the Ld.CIT(A) that in its assessment for

AY 2009-10, the assessee company had disclosed fully and truly all

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 8 ::

material facts necessary for making the claim for set off of unabsorbed

depreciation of AY 2000-01 to the tune of Rs.1,22,19,604/- and

Rs.1,57,94,741/- for AY 2001-02. And we find that the AO had applied his

mind to these relevant facts, as evident from the order passed by him

u/s.154 dated 22/2/2012 and subsequent notice wherein this precise

issue was raised by AO u/s.154 dated 2/8/2012 which was dropped after

being satisfied by the explanation/objection of the assessee as noted

supra. Thus, we find that the Ld.CIT(A) has rightly examined the relevant

facts and correctly held that the AO without satisfying the condition

precedent as given in first proviso to section 147 of the Act, has

erroneously re-opened the assessment u/s143(3) of the Act after ‘4’ years

from the end of the assessment year. Thus, we concur with the view of

the Ld.CIT(A) that in this case, the action to re-open the assessment was

wholly without jurisdiction. For taking such a view, we rely on the decision

of coordinate bench Delhi in the case of DCIT & Anr. v. Dharampal

Satyapal Ltd. & Anr. reported in [2016] 130 DTR 0241 (Del.)(Trib.),

wherein, the Tribunal held as under:

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 9 ::

needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons." Their Lordships added that "The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence….". Therefore, the reasons are to be examined only on the basis of the reasons as recorded.

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 10 ::

formation of the belief must have 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 ITO and the formation of this belief that there has been escapement of the income of the assessee from assessment in the particular because of his failure to disclose fully and truly all material facts. year It is no doubt true that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment.”

“It is a well settled principle of interpretation of statute that the entire statute should be read as a whole and the same has to be considered thereafter chapter by chapter and then section by section and ultimately word by word. It is not in dispute that the Assessing Officer does not have any jurisdiction to review his own order. His jurisdiction is confined only to rectification of mistakes as contained in section 154 of the Act. The power of rectification of mistake conferred upon the Income-tax Officer is circumscribed by the provisions of section 154 of the Act. The said power can be exercised when the mistake is apparent. Even a mistake cannot be rectified where it may be a mere possible view or where the issues are debatable. Even the Income-tax Appellate Tribunal has limited jurisdiction under section 254(2) of the Act. Thus when the Assessing Officer or Tribunal has considered the matter in detail and the view taken is a possible view the order cannot be changed by way of exercising the jurisdiction of rectification of mistake.

It is a well settled principle of law that what cannot be done directly cannot be done indirectly. If the Income-tax Officer

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 11 ::

does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to initiating a proceeding of reassessment or by way of rectification of mistake. In a case of this nature the Revenue is not without remedy. Section 263 of the Act empowers the Commissioner to review an order which is prejudicial to the Revenue.

In Bawa Abhai Singh’s case [2002] 253 ITR 83 (Delhi), a Division Bench of this court of which one of us (D. K. Jain J.) is a Member, clearly held (page 88) :

"The crucial expression is "reason to believe". The expression predicates that the Assessing Officer must hold a belief . . . by the existence of reasons for holding such a belief. In other words, it contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons inducing the belief. Such a belief may not be based merely on reasons but it must be founded on information. As was observed in Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC), the expression "reason to believe" is stronger than the expression "is satisfied". The belief entertained by the Assessing Officer should not be irrational and arbitrary. To put it differently, it must be reasonable and must be based on reasons which are material. In S.Narayanappa v. CIT [1967] 63 ITR 219, it was noted by the apex court that the expression "reason to believe" in section 147 does not mean purely a subjective satisfaction on the part of the Assessing Officer, the belief must be held in good faith ; it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational nexus or a relevant bearing to the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To that limited extent, the action of the Assessing Officer in initiating proceedings under section 147 can be challenged in a court of law."

It was further held that, “We are therefore of the opinion that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 12 ::

reassessment proceeding upon his mere change of opinion” further observed as under :-

“We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 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 clause (e) of section 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 Assessing Officer 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.”

The power under sections 147 / 148 comes into existence if he had reason to believe that income has escaped assessment. Formation of reason to believe that income escaped assessment has to be that of a prudent person. The reasons for such belief have to be recorded in writing on the basis of material in the possession of AO. While the words “reason to believe” are wide in their import, it cannot include a mere suspicion or ipse dixit of the AO. The belief of the AO should lead him to form an honest and reasonable opinion based on reasonable grounds. (ITO vs. Lakhmani Mewal Das – 103 ITR 437 at 448 (SC) and Navinchandra Mohanlal Parik vs. vs. WTO – 124 ITR 68). The reasonability of the

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 13 ::

grounds which led to the formation of belief warranting reopening is tested from the point of view whether or not they are germane to the formation of belief that income escaped assessment and after 4 years, an additional safeguard or condition that escapement of income was due to fault of the assessee, in not fully and truly disclosing the material facts at the time of original assessment. The Hon’ble Supreme Court endorsing the Full Bench decision of the Hon’ble Delhi High Court in CIT vs. Kelvinator of India Ltd. – 256 ITR 1 held in its order reported in 320 ITR 561, “…..that Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have link with the formation of belief.” Therefore, if the fresh tangible material which the AO has in his possession is relevant to have nexus to the formation of belief then, of course, the AO would have the necessary jurisdiction to take action under the Act. What is required to be examined is not the adequacy or sufficiency of the grounds but the existence of belief. In our view, all that one has to examine is that whether there was some material which, gave rise to prima facie view if that income has escaped assessment and the belief was formed in good faith or was it mere pretence for initiating action u/s 147/148 of the Act.

assessment u/s 143(3) of the Act for AY 2009-10, by issuing the

impugned notice u/s 148 of the Act dated 30.03.2016, which was an

event after four (4) years from the end of relevant Assessment Year had

to necessarily satisfy the condition precedent as provided under the first

proviso to sec.147 of the Act i.e. the AO in the reasons recorded before

re-opening of assessment, ought to have pointed out what material facts

necessary for assessment assessee failed to fully and truly disclose. In the

present case, the AO failed to satisfy the requirement of law as provided

for in the first proviso to section 147 of the Act, which omission oust him

from assumption of jurisdiction to reopen the assessment; and it is not

ITA No.1269/Chny/2023 (AY 2009-10) M/s.Ramco Systems Ltd. :: 14 :: the case of the AO that he had any new/tangible material before him to form the belief that there had been any material non-disclosure by reason of which an escapement of income had taken place. Therefore, we find that the condition precedent as provided under first proviso to section 147 of the Act for re-opening of assessment being not satisfied, the impugned notice u/s.148 of the Act dated 30.03.2016 is held to be ab initio void and hence, the Ld.CIT(A) rightly quashed it, which action we uphold.

Order pronounced on the 20th day of November, 2024, in Chennai.

Sd/- Sd/- (अिमताभ शु�ा) (एबी टी. वक�) (AMITABH SHUKLA) (ABY T. VARKEY) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 20th November, 2024. TLN, Sr.PS आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF