ACIT, CENT CIRCLE-1, TRICHY vs. M/S MANGAL & MANGAL, TRICHY

This appeal filed by the revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-19, Chennai, dated 17.03.2022 and pertains to assessment year 2012-13.

The revenue has raised the following grounds of appeal: “1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.

The case has been subsequently reopened u/s. 147 of the Act, for the reasons recorded as per which income chargeable to tax has been escaped assessment, on account of under-assessment of income. Therefore, notice u/s. 148 of :-5-: ITA. No: 511/Chny/2022 the Act, dated 01.10.2018 was issued and served on the assessee. In response, the assessee has filed its return of income on 07.12.2018, admitting total income of Rs. 98,32,25,710/-, which was the same income as reported in return filed in response to notice issued u/s. 153A of the Act. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed making charges of Rs. 5,20,95,198/-, on which TDS applicable as per provisions of section 194C of the Act was not deducted. The Assessing Officer, further noticed that the assessee has claimed sales promotion expenses of Rs. 3,06,55,952/- and majority expenses has been incurred in cash in excess of Rs. 20,000/- in violation of provisions of section 40A(3) of the Act. The Assessing Officer, further noticed that the assessee has claimed EB deposits of Rs. 15,69,118/- with Tamilnadu Electricity Board, but no interest income has been admitted, even though the Electricity board pay 9% interest p.a. on said deposits. The Assessing Officer, further noticed that the assessee has shown a sum of Rs. 4,38,199/- as deposits made for which no interest has been offered in the return. Therefore, called upon the assessee to furnish necessary evidences including supporting details and vouchers for :-6-: ITA. No: 511/Chny/2022 various expenses made and TDS deducted on making charges, interest earned on EB deposits etc. The Assessing Officer, after considering relevant submissions of the assessee and also taken note of various facts completed assessment u/s. 143(3) r.w.s. 147 of the Act and determined total income of Rs. 1,08,73,92,312/-, by making additions towards disallowance of making charges u/s. 40(a)(ia) of the Act, at Rs. 5,35,70,810/-, disallowance of sales promotion expenses at Rs. 1,52,42,402/-, disallowance of chit bonus of Rs. 1,54,13,550/-, disallowance of chit prize u/s. 40A(3) of the Act at Rs. 1,97,54,250/-, addition of interest income on EB deposits for Rs. 1,41,220/- and addition of interest on other deposits @ 10% for Rs. 44,370/-.

Being aggrieved by the assessment order, the assessee preferred an appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee challenged reopening of assessment on the ground that, the Assessing Officer has reopened assessment on ‘change of opinion’ without there being any fresh tangible material came to his possession, subsequent to completion of assessment u/s. 143(3) r.w.s. 153A of the Act. The assessee, further contended that the assessment has been :-7-: ITA. No: 511/Chny/2022 reopened after four years from the end of the relevant assessment years and proviso to section 147(1) of the Act is applicable. Therefore, unless the AO makes out a case of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, the assessment cannot be reopened. The assessee had also challenged various additions made by the Assessing Officer towards disallowance of expenses u/s. 40A(3) of the Act, disallowance of expenses u/s. 40(a)(ia) of the Act and disallowance of chit fund etc, on the ground that the assessee has furnished all details including particulars of TDS and also details of cash payments and proved that the cash payments are not in excess of prescribed limit.

The ld. CIT(A), after considering relevant submissions of the assessee and also taken note of reasons recorded by the Assessing Officer for reopening of assessment held that the, reopening of assessment u/s. 147 of the Act, by issue of notice u/s. 148 of the Act dated 01.10.2018, is not in accordance with provisions of law and same is held to be legally unsustainable. The ld. CIT(A), further held that if you go by the reasons recorded by the Assessing Officer for reopening of :-8-: ITA. No: 511/Chny/2022 assessment, said assessment has been reopened for the failure of the Assessing Officer to carry out necessary verification of details furnished by the assessee, but not for the failure of the assessee to disclose fully and truly all material facts necessary for assessment. Therefore, quashed re-assessment order passed by the Assessing Officer u/s. 143(3) r.w.s. 147 of the Act. The relevant findings of the ld. CIT(A) are as under: “10. The background for reopening the assessment and the contention of the AO justifying the: reopening were examined. The main objection raised by the appellant with regard to legal validity of the reopening of assessment has to be examined in the factual background of the case. 11. The AO in the assessment order has observed that the huge expenses claimed of Rs.5,20,95,198 & Rs.15,40,3410/- on 'making charges-Gold' and 'making charges-Silver' respectively and Rs.3,06,55,952/ on 'sales promotion expenses' were omitted to be verified; during the search assessment proceedings made on account of non-furnishing of details; evidences for TDS even though the same were called for through notices and reminders resulting in escapement of income in the hands of the assessee. 12. Further, the AO observed that in spite of many notices and oral reminders, until the fag end of time barring assessment, the assessee failed to furnish complete details of 'making charges', 'hallmarking charges' sales promotion expenses' and evidence for TDS made, leaving the assessing officer in haziness without any evidence to verify whether TDS were made to consider disallowance the major expenses claimed. The search assessment u/s 143(3) r.w.s. 153A was finally completed on 30.3.2015 making an addition of Rs.2,27,428 on account of undervaluation of closing stock by the assessee since it was a search assessment which requires analysis & scrutiny of seized materials, statements etc., on account of time barring limitations, the issues of disallowance of expenses :-9-: ITA. No: 511/Chny/2022 claimed on making charges, hall marking charges etc, were left untouched in the absence of proper details/ evidence of TDS which were not furnished by the assessee.

The Income-tax Act has provided multiple powers to call for the details including issue of notice u/s. 131 and verification of deduction of TDS from the TDS wing of the Department. If the AO is of the opinion that no TDS has been deducted the matter could have been referred to the TDS wing for appropriate investigation and also could have made an attempt to receive report from the concerned TDS officer and could have utilized the same in completing the assessment. In addition, a cursory look of the Form 3CD filed along with the return the Assessing Officer could have formed an opinion a :-10-: ITA. No: 511/Chny/2022 out the deduction of TDS and other details. There is no observation in the assessment order about the verification of Form 3CD. It appears that no attempt has been made by the AO in this regard.

It has been claimed that no evidences/ details were furnished. The appellant has filed the same details during the course of appellate proceedings. However, even if presumption is drawn that no evidence is furnished, such non-furnishing of evidence during the course of assessme1~i proceedings is a common practice adopted by the assessees. But non-furnishing of evidence, cannot be a reason for reopening of any assessment and thereby no conclusion can be drawn that the appellant has suppressed material facts suggesting escapement of income. The Assessing Officer while completing the assessment, if no evidence is furnished could have proceeded to, complete the assessment on the basis of the material available before him as per the provisions of section 144 of the Act. Failure on the part of the Assessing Officer to examine the issue cannot be a reason on the part of the new Assessing Officer to form a opinion about the escapement of income.

In the instant case, the reasons recorded for reopening of assessment are that the appellant has not furnished the details and the AO has no time to examine the issue. This cannot be reason for reopening of assessment forming a belief that income chargeable to tax has escaped from assessment.

Without any new tangible material/facts coming to the notice of the AO subsequent to the completion of the original assessment, forming opinion about escapement of income, amounts to change of opinion which is legally not permissible.

In the case of Asian Paints Ltd. Vs DCIT 308 ITR 195, the Hon’ble Bombay High Court held that where no new material has come on record or no new information has been received between the date of the order of assessment sought to be reopened and the date of formation opinion by the AO, it is merely a fresh application of mind by the same AO to the same set of facts and the same amounts to reopening of the assessment merely due to change of opinion which is not permissible. The relevant part of the decision of the Hon'ble High Court it: reproduced as under:

Further, the Hon'ble Supreme Court held in the case of CIT Vs. Kelvinator of India Ltd, 320 ITR 561 that the concept of "Change of opinion" must be treated as an in-built test to check 'abuse of power by the AO and if that concept is removed, then review would take place in the garb of reopening the assessment. The Hon' ble Supreme Court held that the AO has the powers to reopen provided there is tangible material to come to the conclusion that there is escapement of income from assessment. The relevant part of the decision of the Hon'ble Supreme Court is reproduced as under: 4. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re- opening could be done under above two conditions and fullfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1-4-1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to :-12-: ITA. No: 511/Chny/2022 believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post 1-4-1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ''reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per .se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has. power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4- 1989, Assessing Officer has power to reopen, provided there is "tangible material” to come to the conclusion that there is escapement of income from assessment.

In the present case no tangible material evidence is available before the AO before forming the opinion about the escapement of income. All the evidences were available before the AO before completing the assessment. Before completing the assessment, the AO has failed to make necessary enquiry/investigation. The opinion was formed on account of non verification of details clue to lack of time. Lack of time to verify the evidences cannot be a reason to complete the assessment. In view of the facts of the case and the binding judicial precedents as mentioned above, the objection raised by the assessee is found to be acceptable and it is held that the reopening of the assessment u/s.147 that was sought to be made based on the same material during the original assessment proceedings and with no new information or material that came to the possession of the AO subsequently, amounts to mere change of opinion without the presence of tangible material and consequently, the reopening of the assessment is not legally tenable.

In view of the foregoing discussion, it is seen that the objection raised by the assessee with regard to the legal validity of the re-opening of the assessment is found to be acceptable. Hence, having regard to the discussion above, it is :-13-: ITA. No: 511/Chny/2022 held that the reopening of the assessment u/s.147 by issue of notice u/s.148 dated 01.10.2018 is not in accordance with the provision's of law and the same is held to be legally unsustainable. The grounds of appeal raised upon this issue are therefore allowed.”

The ld. DR, Shri. Nilay Baron Som, CIT, submitted that the ld. CIT(A) is erred in quashing reopening of assessment u/s. 147 of the Act, without appreciating fact that reopening was made as per the first proviso to section 147 of the Act, since, there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the said assessment year. The ld. DR, further submitted that the ld. CIT(A) erred in holding that the assessment was reopened on the basis of change of opinion without appreciating fact that, the assessee has not furnished the details called for during the assessment proceedings u/s. 143(3) r.w.s. 153A of the Act and thus, when there is no opinion was formed by the Assessing Officer, due to failure on the part of the assessee to furnish necessary details, the question of change of opinion does not arise. The ld. DR, referring to Explanation (1) to section 147 of the Act, mere production of account books or other documents from which material evidence could have, with due diligence been discovered by the Assessing Officer will not necessarily amount :-14-: ITA. No: 511/Chny/2022 to disclosure of material facts necessary to assessment, within the meaning of the above proviso. Therefore, just because the assessment has been completed u/s. 143(3) r.w.s. 153A of the Act, it does not mean that the Assessing Officer has considered all details and the assessee has disclosed full and true particulars of his assessment. The ld. DR, further referring to the decision of Hon’ble Supreme Court in the case of M/s. Larsen and Turbo Ltd vs State of Jharkhand, in Civil Appeal No. 5390/2007, more particularly Para 21 of the judgment submitted that, the expression ‘information’ means instruction or knowledge derived from an external source concerning facts or parties or as to law relating to and/or having a bearing on the assessment. Therefore, if the AO possessed certain information which suggests escapement of income and based on such information if the Assessing Officer form reasonable belief of escapement of income, it cannot be said that the assessment has been reopened on change of opinion. Therefore, he submitted that the ld. CIT(A) is erred in quashing the reassessment order passed by the AO u/s. 143(3) r.w.s. 147 of the Act. In this regard, he relied upon the decision of Hon’ble Madras High Court in the case of Smt. A. Sridevi vs ITO [2018] 409 ITR 502. The ld. DR, had also :-15-: ITA. No: 511/Chny/2022 relied upon the decision of Hon’ble High Court of Delhi in the case of Honda Siel Power Products Ltd vs DCIT [2012] 340 ITR 53 and CIT vs Shriram Chits (Karnataka) P Ltd [2021] 277 Taxman 224 and also Cairn India Ltd vs DCIT [2021] 283 Taxmann.com 243.

The ld. Counsel for the assessee, Shri. S. Sridhar, Advocate, on the other hand supporting the order of the ld. CIT(A) submitted that, the assessment for the impugned assessment year was originally completed u/s. 143(3) r.w.s. 153A of the Act, in pursuant to a search action u/s. 132 of the Act, conducted in the case of the assessee. The assessee has furnished all details during search proceedings and further, in the search proceedings, the Department has in possession all details and books of accounts and other particulars of the assessee with regard to impugned assessment year. Since, the original assessment has been completed u/s. 143(3) of the Act and further, the assessment has been reopened after four years from the end of the relevant assessment, the proviso to section 147(1) of the Act comes into play and as per said proviso, unless the Assessing Officer makes out a case of failure on the part of the assessee to disclose fully and truly all :-16-: ITA. No: 511/Chny/2022 material facts necessary for assessment, the assessment cannot be reopened. The ld. Counsel for the assessee, further submitted that if you go through reasons recorded by the Assessing Officer for reopening of assessment, it is undisputedly clear that the Assessing Officer has reopened the assessment for the simple reason that, the assessee could not furnish certain details called for during the course of assessment proceedings. But, fact remains that if you go through the assessment order passed by the Assessing Officer, it is noticed that the Assessing Officer has reopened the assessment to verify the facts with regard to applicable TDS provisions on expenses and other details, but nowhere the Assessing Officer has makes out a case of escapement of income, on the basis of fresh tangible material which came into his possession subsequent to completion of original assessment. Therefore, he submitted that it is a clear case of change of opinion and thus, the reopening of assessment is bad in law and accordingly, the ld. CIT(A) has rightly quashed re-assessment order passed by the Assessing Officer and their order should upheld.

Further, the assessment for the impugned assessment year has been reopened after four years from the end of the relevant assessment years. Once, the original assessment has been completed u/s. 143(3) of the Act and the assessment has been reopened after four years from the end of the relevant assessment year, then as per first proviso to section 147 of the Act, 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 any assessment year on reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. In the present case, there is no dispute with regard to the fact that, the original assessment order has been completed u/s. 143(3) r.w.s. 153A of the Act, in consequent to search. In the case of search proceedings, the Department will gather all information and also collect necessary books of accounts of the :-20-: ITA. No: 511/Chny/2022 assessee to frame an assessment. Therefore, once the assessment has been completed u/s. 143(3) r.w.s. 153A of the Act, in our considered view, the question of failure of the assessee to disclose fully and truly all material facts necessary for his assessment does not arise. In any case, if you go by the reasons recorded by the Assessing Officer, it is undoubtedly clear that the assessee has furnished all details in respect of expenses debited under the head making charges and TDS particulars, expenses debited under the head sales promotion expenses etc. As regards, interest income on EB deposits, it was not the case of the assessee that the electricity board has paid or provided interest to the assessee, but the assessee has not offered such interest for taxation. But, the Assessing Officer simply assumed that the electricity board will pay interest @ 9% and assessee might have received said interest, without any reference to clear findings of facts that, the assessee has received interest income on such deposits. In so far as, interest on other deposits, the Assessing Officer has presumed that said deposits was interest bearing deposits and the assessee has not disclosed interest income for taxation. From the above reasons recorded by the Assessing Officer, we find that the Assessing Officer has :-21-: ITA. No: 511/Chny/2022 formed reasonable belief of escapement of income, without there being any live nexus between fresh material and escapement of income, but purely on suspicion manner the assessment has been reopened. Therefore, it is a classic case of change of opinion, but not reopening of assessment on the basis of fresh tangible material.

Coming back to various case laws relied upon by the ld. DR. The ld. DR, has relied upon the decision of Hon’ble High Court of Madras in the Smt. A. Sridevi vs ITO [2018] 409 ITR 502 (Mad). We find that in the above case, the original assessment has been completed u/s. 143(1) of the Act and the assessment has been reopened on the basis of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Under those facts, the Hon’ble High Court held that, when reassessment proceedings were initiated against the assessee, on the ground that the assessee has not filed balance sheet or statement of affairs related to various advances, impugned reassessment proceedings were justified.

At this stage, it is relevant to refer to the decision relied upon by the Ld. Counsel for the assessee. The Ld. Counsel for the assessee, has relied upon the decision of Hon’ble Bombay High Court in the case of Asian Paints vs DCIT, 308 ITR 195. The Hon’ble High Court in the context of reopening of assessment held that, where no new material has come on record or no new information has been received between the date of the order of assessment sought to be reopened and the date of formation of opinion by the AO, it is merely a fresh application of mind by the same Assessing Officer to the same set of facts and the same amounts to reopening of the assessment merely due to change of opinion which is not permissible. The relevant findings of the Hon'ble High Court is as under:

The Ld. Counsel for the assessee, had also relied upon the decision of Hon’ble Supreme Court in the case of CIT vs Kelvinator of India Ltd, 320 ITR 561. The Hon’ble Supreme Court in light of concept of "Change of opinion" held that, the concept of change of opinion must be treated as an in-built test to check 'abuse of power by the AO and if that concept is removed, then review would take place in the garb of reopening the assessment. The Hon'ble Supreme Court further held that, the Assessing Officer has the powers to reopen, provided there is tangible material to come to the conclusion that there is :-25-: ITA. No: 511/Chny/2022 escapement of income from assessment. The relevant findings of the Hon’ble Supreme Court are as under: “4. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re- opening could be done under above two conditions and fullfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1-4- 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post 1-4- 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ''reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per .se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has. power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989, Assessing Officer has power to reopen, provided there is "tangible material” to come to the conclusion that there is escapement of income from assessment.”