ACIT 2(3), MUMBAI vs. TATA CHEMICALS LTD, MUMBAI

The brief facts of this case are that originally assessment in this case was completed u/s 143(3) vide assessment order dated 10-01-2005. Subsequently, the AO recorded reasons u/s 147 for reopening the case and issued notice u/s 148 dated 26-05-2008. It is noted that the AO has recorded following reasons:- “In this case, the assessment was completed u/s. 143(3) on 1 0.1.2005 determining the total income at Rs. 104,94,92,278/-. It is seen from the records that income has escaped assessment for the following reasons:- 2. While computing the deduction u/s 80-IA, vi) the profit on production of steam is wrongly determined on notional basis (since the steam is not a marketable product) thereby allowing excess deduction of 80-IA. vii) the sale value of power has been adopted as per the GEB rate, bill the same has not been adopted for working out the cost of production. Thus, the assessee has suppressed the cost of production and inflated the profits resulting in excess deduction of 80IA claim. viii) certain pass through components like Fuel adjustment Charges, electricity duty etc has not been considered for arriving a; the market value of the electricity. ix) separate accounts for the power plant and set off losses incurred by the eligible business has not been worked out (i.e power plants in the initial years against assessee's income from other plants without adjusting the same against profits of power plant eligible for 80IA deduction) x) though the assessee is booking average 9% of book depreciation to 80-IA Units, the IT depreciation claimed is only 0.28% which enable the assessee to show higher profit for the 80IA units and claim excess deduction. In view of the above, I have reason to believe that income to the tune of Rs. 38.72 crores has escaped assessment for AY 2002-03 by allowing excess deduction u/s 80-IA. Accordingly, Notice u/s 148 of the l.T. Act is issued after obtaining approval from CIT-2, Mumbai as per the provisions of section 151 of the Income Tax Act, 1961.”

The assessee, in response to the aforesaid notice filed its objections 16-09-2009 for reopening of the case, which was disposed of by the Ld. AO, vide his interim order dated 16-10-2009, wherein he rejected the objections and went ahead with the framing of the re-assessment order. The assessee contested the re-assessment order in appeal before the Ld. CIT(A) wherein challenge was made to the jurisdiction of the AO in reopening of the impugned assessment and also on the merits of the additions / disallowances made by the AO in the re- assessment order. Ld. CIT(A) considered both the aspects but decided the appeal on the issue on the jurisdiction of reopening. It was noted by him that reopening of the assessment done by the AO was not in accordance with law on at least two grounds, viz. there was no failure on the part of the assessee in disclosing material facts and the reopening was based upon the change of opinion. Thus, taking into account both these aspects, the reopening was held to be invalid and consequently the re-assessment order was quashed. Relevant part of his observations is reproduced below:

We have examined the Reasons recorded by the AO, AO’s order dated 16-10-2009 disposing of objections raised by the assessee with regard to reopening of the impugned assessment and also detailed findings of the Ld. CIT(A) while quashing the impugned assessment order. It is noted by us that re-assessment has been held to be invalid by the Ld. CIT(A) on two grounds as stated above. Thus, we shall deal with both the grounds, one by one, as under:-

We have examined the aforesaid aspect of the matter. It is noted that provisions of section 147 have been brought on the statute so as to enable the AO to bring to tax any income that may have escaped assessment. But, these extraordinary powers have been given to the AO with certain safeguards. Since reopening of an already concluded assessment pierces the very concept of finality of litigation which is basic thread of our constitution, therefore these provisions have been drafted in a very careful manner. Thus, these powers can be exercised by an AO strictly in accordance with law only as contained in sections 147 to 151 of the Act read with other applicable provisions of the Act. If case of an assessee falls within the situations as stipulated in these sections, only then, its case can be reopened by an AO that too after complying with the conditions as have been prescribed in these sections. The conditions vary according to the time lapsed in reopening of the case since the date of expiry of the impugned assessment year.

One of the situations as envisaged in section 147 is that if original assessment of an assessee was done u/s 143(3) and 4 years have expired since end of impugned assessment year, then it cannot be reopened unless conditions prescribed in the first proviso to section 147 exist. In the case before us, admittedly, the original assessment of the assessee was done u/s 143(3) and reopening has been done after the expiry of 4 years from the end of the assessment year, as would be evident from the fact that notice u/s 148 was issued on 26-05-2008 which is after the expiry of 4 years from the end of assessment year 2002-03. Thus, undisputedly, the reopening could have been done only subject to first proviso to section “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”

The perusal of aforesaid proviso makes it clear that no assessment can be reopened unless 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 his assessment for the impugned assessment year. Thus, while recording ‘Reasons’, it is incumbent upon the AO to firstly make an allegation in the ‘Reasons’ recorded and then also to make out a case that there was a failure on the part of the assessee in disclosing fully and truly all material facts necessary for his assessment for the impugned assessment year. Perusal of the ‘Reasons’ recorded by the AO reveals that no such allegation has been made in the ‘Reasons’. Thus, the foremost condition to enable the AO to reopen the original assessment completed order dated 10-01-2005 passed u/s 143(3), is found to be clearly missing here. So much so, even in the re-assessment proceedings, the AO has nowhere been able to show anything from which it could be inferred that there was any failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment of the assessee.

It is also noted by us that during the course of re-assessment proceedings, the assessee filed its detailed objections vide its letter dated 16-09-2009. These objections were disposed of by the AO vide his interim order dated 16-10-2009. It is noted by us that in the objection disposal order also, the AO nowhere commented or clarified the objection raised by the assessee in this regard. For the sake of ready reference, conclusive part of the said interim order is reproduced below:- “5.0 A plain reading of the assessee's submission Quoted shows that the assessee has nothing to object on merit. The assessee has been only raising objections on the manner in which, and the framing of questions in notice dated 4.09.09. The assessee has further contended that the issues raised in the notice referred to in para 3.3 has been dealt with by CIT in exercise of his powers u/s 263 and dropped the proceedings. The assessee has also come to the conclusion that this office has proposed to reopen the assessment u/s 148 not only for A.Y. 2003-04 but also for A.Y. 2002-03 aggrieved (emphasis placed) by the action of the Commissioner in dropping the proceedings u/s 263. 5.1 One of the objections of the assessee that the reasons for reopening the assessment are basically the objections raised by the internal audit and the assessee was not given an opportunity to interact with the auditors. Even for a moment it is presumed that the ground for reopening the assessment was objections raised by internal audit, the assessee's objection holds no merit. 6.0 To sum up, as there is no merit in assessee’s argument, the assessee’s objections are hereby rejected.”

Thus, from the above, it is clearly noted that the AO has not brought out anything to support his action of reopening the assessment. He has not been able to even mention for the sake of mentioning, anywhere in his interim order or final re-assessment order that there was any failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment.

However, in the grounds raised before us by the Revenue, it is mentioned that Explanation 1 of section 147 says that production before the AO of books of account or other evidences from which material evidence with due diligence could have been discovered by the AO will not necessarily amount to disclosure. We have considered this Explanation also. It is noted by us that Revenue has misread the meaning and intent of this Explanation. Explanation 1 may come to the rescue of the Revenue in those cases where though the assessee has in effect suppressed material facts, but he is trying to take shelter of the fact that he had produced books of account and other related evidences before the AO from which material evidence could have been discovered by AO with due diligence. But, for taking benefit of the Explanation 1, the AO has to first show that there was a failure on the part of the assessee in bringing on record certain facts which if the assessee would have brought on records, then it could have altered the conclusions drawn by the AO while determining the taxable income and computing tax liability of the assessee in the original assessment proceedings. It is noted that that failure of the assessee of ‘disclosure of material facts’ is a condition precedent as stipulated in the proviso to section 147 to enable the AO to exercise his powers u/s 147. The Explanation will certainly not obviate this jurisdictional condition. Thus, if the meaning and scope of Explanation 1 is understood and applied in the manner as Revenue is asking us to do by way of this ground, then it will obviously amount to making first proviso to section 147 as otiose and redundant, which in our opinion cannot be the intention of the legislature.

The powers u/s 147 granted upon the AOs by the legislature are undoubtedly wide, but these powers are certainly not plenary. These powers are subject to certain fetters in the form of jurisdictional conditions which are mandatorily to be complied with for ensuring the exercising of these powers in justified and fair manner and to avoid harassment to the taxpayers as may be caused because of reopening of the cases in undeserving cases in a callous manner.

Therefore, in our considered opinion, before taking shelter of Explanation 1 to section 147, it is mandatory on the part of the AO to comply with the conditions stipulated in first proviso to section 147, by recording a finding in the ‘Reasons’ and making out a case of failure of the assessee of disclosing fully and truly all material facts necessary for his assessment for the impugned assessment year. It is noted by us that the law in this regard is not res integra. It is noted that many courts in our country including the Hon’ble Bombay High Court explained the correct position of law in this regard from time to time, and some of them are discussed hereunder.

In the case of ICICI Bank Ltd vs DCIT 268 ITR 203 (Bom), it has been clarified by the Hon’ble Bombay High Court that Explanation 1 to section 147 of the Act has to be read with section 148 of the Act in its entirety and in case there is no failure on the part of the assessee to disclose fully and truly all the material facts, then no reopening can be done beyond the period of 4 years from the end of the relevant assessment year where original assessment was framed u/s 143(3). Relevant part of the observations the Hon’ble Bombay High Court is reproduced below:- “Under s. 147 of the IT Act, concluded assessments can be reopened beyond a period of 4 years from the end of the relevant assessment years only if there is failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment. Having furnished all material facts even if an assessee erroneously claims higher depreciation, it will not be a case of failure to disclose fully and truly all material facts. At what rate the depreciation is to be claimed is a matter of legal inference to be drawn from the material facts. If the legal inference drawn from the material facts is erroneous it cannot be said that there is failure on the part of the assessee to disclose material facts. In the present case, on the material facts disclosed, the assessee had claimed depreciation at 40 per cent and the same was allowed by the AO. It is not the case of the Revenue that the facts disclosed by the assessee were incorrect or that there were any other facts which were material for the assessment which have not been disclosed by the assessee. Under the circumstances, if there is no failure to disclose material facts, then, even if there is excess relief granted, the assessments cannot be reopened beyond the period of 4 years from the end of the relevant assessment years. This Court in the case of IPCA Laboratories Ltd. (supra) and in the case of Bhor Industries (supra) has held that notice for reopening of the assessment cannot be issued after a period of 4 years unless the escapement of income is on account of failure on the part of the assessee to disclose fully and truly all material facts. It has been further held that the Explanation to s. 147 of the IT Act has to be r/w s. 148 of the IT Act in its entirety. In the light of the aforesaid decisions, in the present case, there being no failure on the part of the assessee to disclose fully and truly all material facts, the impugned notices issued beyond the period of 4 years from the end of the relevant assessment years, are liable to be held to have been issued in contravention of the provision of the IT Act.”

Similarly, in the case of Hindustan Lever Ltd vs R.B. Wadekar 268 ITR 332 (Bom) it has been emphasized by the Hon’ble Bombay High Court that reasons recorded by the AO must contain the finding with regard to the alleged failure on the part of the assessee to disclose fully and truly all material facts. It has also been observed by the Hon’ble High Court that the ‘Reasons’ recorded by the AO have to be read as it is. The AO has to speak through his ‘Reasons’ and should disclose an open mind through ‘Reasons’ recorded by him. Thus, it is for the AO to reach to the conclusion in his ‘Reasons’ as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for the concerned assessment year. Relevant part of the judgment is reproduced below:-

Similarly, in the case of Lok Housing & Construction Ltd vs DCIT 348 ITR 338 (Bom) it was held by the Hon’ble jurisdictional High Court that a jurisdictional condition precedent for reopening of the cases where first proviso to section 147 is applicable, is that there must be failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment for the impugned assessment year. Relevant part of the observations of the said judgment is reproduced below:- “The reopening of the assessment in the present case is beyond the period of four years of the end of the relevant assessment year. In such a case, the power of the AO is structured by the requirement, a jurisdictional condition precedent, that there must be a failure on the part of the assessee to fully and truly disclose all the material facts necessary for the assessment for that assessment year. Ex facie, the reasons which have been disclosed by the AO do not refer to any failure on the part of the assessee to disclose material facts, nor is there any allegation of suppression on the part of the assessee. On the contrary, the AO has relied upon Note 3(e) of Sch. P to the notes forming part of the accounts. The assessee had clearly disclosed Rs. 20.58 crores was waived/foregone and that the payment of the balance was to be made in accordance with the settlement terms. The power of the AO to reopen beyond a period of four years is even more restricted than when the reopening takes place within a period of four years of the end of the relevant assessment year. In the present case, the condition precedent to the invocation of the jurisdiction is clearly absent since there is not even an averment to the effect that there was a failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment.”

Turning back to the facts of the case before us in the light of law as explained in aforesaid judgments, it is noted that nothing has been recorded by the AO in the ‘Reasons’ about any failure on the part of the assessee to disclose fully and truly all material facts necessary for the impugned assessment. It has nowhere been mentioned by him that which fact or material was not disclosed by the assessee. Thus, vital link between ‘Reasons’ and his findings has not been established by him. This vital link is the safeguard against arbitrary reopening of the concluded assessment. The ‘Reasons’ recorded cannot be supplemented by way of further observations in the assessment order or in any other manner. The validity of the reopening can be examined on the basis of ‘Reasons’ alone and not in supplementary material. Thus, taking into account all the facts and circumstances of the case, we find that the reopening has been done without complying with the mandatory jurisdictional condition precedent as stipulated in first proviso to section 147. Thus, reopening is invalid on this ground.

It has also been held by Ld. CIT(A) that ‘Reasons’ recorded are invalid in the eyes of law because these have been recorded on the basis of change of opinion of the AO.

We have examined this aspect also in detail on law as well as on facts. The legal requirement is that the reopening is not permissible to reappraise or review the same material which has been taken into consideration while framing the original assessment order. The scope of reopening as prescribed u/s 147 is confined to bring to tax the income escaped. The law in this regard has been explained in detail by Hon'ble Supreme Court also, time and again. In the case of CIT vs Kelvinator India Ltd 320 ITR 561 (SC), it has been held by Hon'ble Supreme Court that undoubtedly, after 1st April, 1989, power to reopen the assessment as prescribed u/s 147 is much wider. However, mere change of opinion cannot per se operate reasons to reopen an already concluded assessment. In other words, the AO has power to re-assess but no power to review. Thus, if the concept of ‘change of opinion’ is removed, as in sometimes done by the department, review would take place in the garb of reopening of the assessment. Therefore, concept of change of opinion is an enabled test to check abuse of power by the AO. Hence, the AO has power to reopen the assessment u/s 147 provided there is a tangible material to come to the conclusion that there is escapement of income from assessment. Thus, for valid reopening of the case, the ‘Reasons’ recorded by the AO must show a live link of the material considered by the AO for reopening with the formation of belief by the AO of escapement of income.

In the light of the legal position as has been discussed above by us, we have examined the facts of this case. Perusal of reasons recorded by the AO reveals that as per belief of the AO, deduction u/s 80IA available to the Mithapur power plant of the assessee was wrongly determined in the original assessment proceedings completed u/s 143(3) on 10-01-2005 for impugned assessment year i.e. AY 2002-03.

In this regard it was noted by us on the basis of information provided by both the parties to us that the year before us, i.e. A.Y 2002-03 is the second year of claiming the benefit of deduction u/s 80-IA on the income of new power plant located at Mithapur. The deduction was claimed for the first time in the year AY 2001-02. The assessment order was framed u/s 143(3) for AY 2001-02 vide order dated 29-03-2004 wherein the claim of the assessee was examined in detail and thereafter only the benefit of deduction was allowed after re-computing the same as was allowable to the assessee. Relevant part of the assessment order for A.Y. 2001-02 is reproduced below:-

Hence, this claim is being made by the assessee for the first time in the assessment year under reference i.e. in AY 2001-02. In its letter, the assessee further submitted that as per the provisions of Section 80IA as applicable to the year under reference, it is entitled to a deduction @ 100% of the profits of the power plant as against 30% of the profits as claimed in the return of income - A. Y. 2001-02 being the first assessment year during which the 80lA claim is made. On perusal of the said claim, I am in agreement that the conditions stipulated for entitlement of deduction under Section 80IA have been fully complied with and hence the assessee is entitled for deduction u/s 80-IA on the new Power plant at Mithapur @ 100% of the profits of the new power plant. As per the requirements of Section 80IA, the assessee will now be required to continue to claim 80IA deduction on this plant for the next 9 consecutive assessment years. However, it is noticed that while computing the deduction u/s 80IA on the new power plant at Mithapur , the assessee has considered miscellaneous income of Rs.30,00,000/- (being income on sale of fly ash generated) as part of the profits and gains derived from the business and considered the same for computing deduction u/s 80IA. In my view, the said income cannot be said to have been derived from business of the power plant and hence the same requires to be excluded while computing 80lA deduction, Accordingly, the claim of the assessee for deduction u/s 80lA on new power plant at Mithapur works out to Rs.12,00,000/- (being 100% of the profits) and the same is granted.” 24. Similarly, when the original assessment proceedings for the impugned assessment year, i.e. A.Y. 2002-03 were carried on, a query was asked by the AO with regard to the claim of deduction u/s 80-IA on the Mithapur Power plant. The same was replied by assessee, vide letter dated 23-12-2004 as under:-

Claim for deduction u/s 80lA on Power Plant (HPB-3 & 1T-9) at Mithapur In the Return of Income, we had claimed relief u/s 80lA on our power plant at Mithapur @ 30% of the profits and gains. However, as per Section 80IA(4) (iv) r.w.s. 80IA(2), we claimed the benefit of Section 80lA commencing from Assessment Year 2001-2002. This year (Assessment Year 2002-2003) being the second year of claim, we are entitled to claim 100% of the profits and gains of the power plant. Hence, we request you to kindly grant us deduction u/s 80lA @ 100% of the profits. For your ready reference, we enclose herewith computation of income for deduction u/s 80lA alongwith audited accounts of this new industrial undertaking duly certified by Chartered Accountant. As per the audited accounts, our claim u/s 80lA @ 100% is RS.38,72,93,719/- as against Rs.36,16,00,000/- claimed in the Return of Income which may please be accepted. We would also like to inform you that on similar lines, you have already considered and allowed our 80lA claim on Mithapur Power Plant for the previous assessment year i.e. Assessment Year 2001-2002.”

Thereafter, the AO framed original assessment u/s 143(3) dated 10- 01-2005 wherein benefit of deduction on the new power plant of Mithapur was allowed by observing as under:- “12. Claim for deduction u/s 80IA on new Power Plant of Mithapur:- 12. In the Revised Return of Income filed on 28-3-2003, the assessee had claimed deduction of Rs. 10,84,80,000/- (being 30% of the profits of' eligible business) on its new power plant at Mithapur which started generating power with effect from 11th May' 1995 . The relevant working of the 80lA claim on the new power plant was filed alongwith the revised return of income. 12.2 During the course of assessment proceedings, the assessee revised its claim u/s 80lA on the power plant from 30% to 100%. Vide letter dated December 23, 2004 the assessee furnished detailed submissions alongwith the audited accounts of the power plant duly certified by the Chartered Accountant. As per audited accounts, the 80lA claim worked out to Rs.38,72,93, 719/- (being 100% of the profits & gains of the power plant).

Thus, from the perusal of the above explanations and discussions made in the assessment orders it is clear that requisite material was obtained by the AO which was duly considered and only thereafter, the benefit of deduction was allowed to the assessee as was available in the assessment order passed u/s 143(3). Under these circumstances, it is not legally permissible to reopen the case merely reappraising same material and reviewing the decision already taken by the AO. It is well settled law that reopening based upon change of opinion of the AO is not permissible in the eyes of law. Thus, on this ground as well, the reopening has been rightly held as invalid by Ld. CIT(A).

Before parting with, we would like to make reference to a recent judgment of Hon’ble Delhi High Court in the case of Principal CIT vs Samcor Glass Ltd judgement dated 12.10.15 wherein it was held by the Hon’ble High Court that where the reopening is done beyond 4 years and original assessment was done u/s 143(3) and yet, the ‘Reasons’ for reopening did not categorically state that there was failure by the assessee to disclose any material particulars on the basis of which there were reasons to believe that income had escaped assessment, then, the reopening would be without authority of law. It was also held by the Hon’ble High Court that in case reopening is done mechanically and casually, then it results in unnecessary harassment of the assessee. Relevant part of observations of Hon’ble High Court is reproduced hereunder for the sake of ready reference:- 7. The Court is of the view that notwithstanding several decisions of the Supreme Court as well as this Court clearly enunciating the legal position under Section 147/148 of the Act, the reopening of assessment in cases like the one on hand give the impression that reopening of assessment is being done mechanically and casually resulting in unnecessary harassment of the Assessee. 8. The Court would have been inclined to impose heavy costs on the Revenue for filing such frivolous appeals but declines to do so since the appeals are being dismissed ex parte. However, the Court directs the Revenue through the Principal Chief Commissioner of Income Tax (Pr CIT) to issue instructions to the AOs to strictly adhere to the law explained in various decisions of the Supreme Court and the High Court in regard to Sections 147/148 of the Act and make it mandatory for them to ensure that an order for reopening of an assessment clearly records the compliance with each of the legal requirements. Secondly, the AOs must be directed to strictly comply with the law explained by the Supreme Court in GKN Driveshafts (India) Lid v. Income Tax Officer (2003) 259 ITR 19 (SC) as regards the disposal of the objections raised by the Assessee to the reopening of the assessment.”

We believe that concerned Chief Commissioners have already taken requisite steps under guidance from the CBDT to formulate and issue the requisite set of instructions to the AO so as to enable the AOs to reopen the cases only in desired and deserving cases so as to build up the faith of Income-tax department which will, in turn, increase voluntary compliance by the taxpayers.

With the aforesaid directions, the appeal filed by the Revenue is hereby dismissed.