ITO WD 20(3)(1), MUMBAI vs. UNNOSOURCE CORPORATION, MUMBAI

Per Jason P. Boaz, A.M.

These appeals by the Revenue are directed against the orders of the CIT(A)-31, Mumbai dated 21.07.2014 for assessment years 2005-06 to 2008-09. These appeals having common issues and being heard together are being disposed off by way of this combined order. 2. The facts of the case, briefly, are as under: - 2.2 The assessee is a firm engaged in providing all types of ITES work related to the field of civil engineering, M.S. structure designing and detailing of drawings. In this case the returns of income filed by the assessee for A.Y. 2005-06 to 2008-09 declaring NIL income were processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act'). The assessments for A.Y. 2005-06 and A.Y. 2006-07 were completed under section 143(3) of the Act vide orders dated 06.12.2007 and 17.02.2008 respectively wherein the income was assessed at NIL after accepting the assessee’s claim for deduction under section 10A of the Act. Subsequently, proceedings under section 147 of the Act were initiated and notices under

2 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation 148 of the Act were issued to the assessee after recording almost similar reasons for these assessment years, basically relating to the view that the assessee’s claim for deduction under section 10A in these years was not genuine since the similar claim for A.Y. 2009-10 was found to be not genuine. For the purpose of clarity, we extract hereunder the reasons recorded by the Assessing Officer (AO) for A.Y. 2005-06: - “The reasons for reopening are as under: In this case the original return of income was filed on 30.10.2005 showing total income at Rs.NIL. Assessee has claimed exemption u/s. 10 but during assessment proceedings for A.Y. 2009-10, it was noticed that the claim is not genuine. 2. In view of this facts and circumstances of the case, I am satisfied that income of Rs.39,32,001/- chargeable to tax has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961 for the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for the previous year relevant to the AY 2005-06.” The assessments for assessment years 2005-06 to 2008-09 were completed under section 144 r.w.s 147 of the Act vide orders dated 18.03.2013 wherein the assessee’s claims for deduction under section 10A of the Act for these years was disallowed. 2.2 Aggrieved by the orders of the assessment for assessment years 2005-06 to 2008-09 dated 18.03.2013, the assessee preferred appeals before the CIT(A)-31, Mumbai challenging these orders of assessment both on (i) technical grounds, i.e. the validity of proceedings initiated under section 147 of the Act, issue of notices under section 148 of the Act on 29.30/3.2002 and the validity of the resultant orders of assessment dated 18.03.2013; and (ii) on the merits of its claim for deduction under section 10A of the Act. 2.3 In the impugned orders for assessment year 2005-06 and 2006- 07, the learned CIT(A) allowed the assessee’s appeal on both the technical grounds of validity of proceedings under section 147/148 of the Act and validity of order of assessment as well as on the merits of the claim for deduction under section 10A of the Act, holding as under at paras 5 to 8 as under: -

3 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation “5. In the present appeal, the appellant has challenged the validity of the reopening and the disallowance of deduction u/s 10A. I have carefully considered the facts relating to the grounds as they emanate from the impugned assessment order and the submissions made during these proceedings. 5.1 In Ground Nos. 1 and 2, the appellant has challenged the reopening of assessment in the present case as bad in law. It has been submitted that as per the provisions of the Act; reopening of an assessment is possible only when there is formation of belief by the AO that income has escaped assessment. Also, in cases where re- opening is sought to be done after a period of 4 years from the end of the relevant assessment year, it is stated that the same can be resorted to only if the income chargeable to tax has escaped assessment on account of failure of the assessee to disclose fully and truly all material facts. In the present case, it is submitted that the appellant had disclosed all particulars relating to the claim u/s 10A and that assessment u/s 143(3) was originally completed by the AO after due scrutiny of the appellant's claim of deduction u/s 10A. It is further stated that the re-opening of the assessment has been done only on the basis of the denial of the claim u/s 10A for A.Y. 2009-10 and that there is nothing to show that the appellant had not made a full or complete disclosure of the material facts. 5.1.1 As per the facts of the case, the original assessment for A.Y. 2005 - 06 was completed u/s 143(3) vide order dated 06/12/2007 accepting the returned income of Rs. Nil. In the said order the AO discussed the requirements for claim u/s 10A, observing as follows: "On verification of detailed submitted by the assessee during the course of assessment proceeding and return of income filed, the firm has fulfilled the above conditions laid down by the Act. Hence exemption claimed u/s 10A of the I.T. Act is allowed. " 5.1.2 In the impugned assessment order, the reasons recorded for reopening of assessment are as follows: "In this case the original return of income was filed on 30.10.2005 showing total income at Rs. Nil. Assessee has claimed exemption u/s 10 but during assessment proceedings for A. Y. 2009-10, it was noticed that the claim is not genuine." Thus the sole basis for reopening the assessment in the present case is the disallowance of the appellant's claim during the assessment for A.Y. 2009 -10. 5.1.3 The notice u/s 148 was issued on 30/03/2012 i.e. more than 4 years after the end of the relevant assessment year. Thus the first proviso to section 147 would be applicable in the instant case. The said proviso reads as under: “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

4 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation has escaped assessment for such assessment year by reason of the failure on the part of 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." Under section 147, the primary condition to be satisfied prior to initiation of reassessment is that the Assessing Officer must have 'reason to believe' that income chargeable to tax has escaped assessment and reopening must not be based on a mere change of opinion. In particular, the above proviso lays down that once an assessment is already completed under section 143(3), reopening can be only done in the circumstances specified in the statute i.e. on account of failure of the assessee to file a return under section 139 or in response to notice under section 148 or on account of the assessee's failure to disclose fully and truly all material facts necessary for assessment. 5.1.4 In the case of CIT vs Kelvinator India reported at 320 ITR 561 (SC), the Hon'ble Supreme Court had affirmed the decision of the Delhi High Court reported at 133 Taxman 433 wherein it had been held that a mere change of opinion would not confer jurisdiction upon the Assessing Officer to initiate proceedings under section 147. The Apex Court held that "after 01.04.1989, the Assessing Officer had the power to reopen provided there is tangible material to come to a conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of belief." In the case of Aventis Pharma Ltd. vs ACIT reported at 323 ITR 570, the Hon'ble Bombay High Court dealt with a case where the revenue sought to reopen an assessment in order to withdraw a deduction allowed while computing long term capital loss and also to revise the rate of depreciation disallowed earlier. The Court held that where the material facts relating to these issues were already before the Assessing Officer at the time of the completion of the original assessment, such reopening would amount only to a change in opinion. In its decision in the case of CIT vs Usha International ITA 2026/2010 dated 21.09.2012, the Hon'ble Delhi High Court held as follows: “13. It is, therefore, clear from the aforesaid position that: (1) Reassessment proceedings can be validly initiated iin case return of income is processes under section 143(1) and no scrutiny assessment is undertaken. In such case there is no change of opinion. (2) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour or the assessee. Reassessment proceedings in the said case will be hit by principle of - change of opinion. (3) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations it should be accepted that the issue

5 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons." 5.1.5 In the decision rendered in the case of CIT v Foramer France reported at 264 ITR 566, the Apex Court upheld the decision of the Allahabad High Court wherein it had been held that reopening of assessment was not permissible after 4 years unless there had been failure on the part of the appellant to make full and true disclosure of material facts. In the said case, the appellant was a foreign company engaged in the business of oil and gas exploration. Proceeds from manning and management contracts received by petitioner were originally assessed in February, 1991 under section 143(3) treating the same as business income in terms of section 44BB. Subsequently, following Tribunal's decision rendered in case of petitioner's expatriate employee, the AO issued a notice under section 148 seeking to reassess same income as fees for technical services. The Court held in favour of the appellant and reassessment was struck down. 5.1.6 In the decision rendered in the case of Voltas Ltd. v ACIT reported at 349 ITR 656, the Bombay High Court held that when a notice was issued for reopening a case after expiry of four years from end of relevant assessment year, the AO must apply his mind to the fundamental question as to whether there has been a failure to disclose all material facts on part of assessee and that where there is no failure on part of assessee to disclose all material facts necessary for assessment, fundamental condition for reopening assessment beyond a period of four years does not get fulfilled and, in such a case, assessment cannot be reopened. The Court held as follows: " .... 9. The assessment for Assessment Year 2005-06 is sought to be reopened beyond a period of four years of the end of the relevant assessment year. Both the grounds which have been formulated by the Assessing Officer for reopening the assessment pertain to events which have taken place after the order of assessment was passed. The first of those is the judgment of the Special Bench of the Tribunal which was delivered on 30 June 2010, according to which unabsorbed depreciation for the period up to 1996-97 could be carried forward and set off against the income under any head for a maximum period of eight assessment years. Consequently according to the Assessing Officer unabsorbed depreciation pertaining to Assessment Year 1994-95 could not have been set off against the income for Assessment Year 2005-06. The second of those events is a legislative amendment brought about by the Finance Act of 2009 with retrospective effect from 1 April 2001. According to the Assessing Officer income was computed under section 115JB without any addition being made on account of provision for diminution in the value of investment and provision for doubtful debts and advances. Both the reasons which have been indicated by the Assessing Officer may be reflective of the fact that there is an escapement of income. But, that in itself is not sufficient to

6 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation

validate the reopening of assessment beyond a period of four years. Beyond a period of four years, the power of the Assessing Officer is structured by the requirement that there must be a failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment. Neither the reasons which have been communicated to the assessee nor for that matter the order passed on the objections raised contains any allegation or statement that there has been a failure on the part of the assessee to disclose fully and truly material facts necessary for the assessment. While a subsequent decision of a Court or a legislative amendment enforced after the order of assessment may legitimately give rise to an inference of an escapement of income, before the Assessing Officer proceeds to reopen an assessment after the expiry of four years of the end of the relevant Assessment Year, he must nonetheless apply his mind to the fundamental question as to whether there has been a failure to disclose on the part of the assessee. In the present case, ex facie there is no such allegation. Moreover, the return of income and the material placed on the record by the assessee together with the return would make it abundantly clear that the assessee had set forth the basis of its claim and there was no suppression of material facts. In these circumstances, and for the reasons that are stated hereinabove, we are of the view that the fundamental condition for reopening the assessment beyond a period of four years has not been fulfilled. 9A. In Sesa Goa Ltd. v. Jt. CIT [2007] 294 ITR 101/[2008] 168 Taxman 281 (Bom.) a Division Bench of this Court has held that a subsequent decision of a Court cannot justify the reopening of an assessment after a period of four years by itself, as the subsequent decision would not necessarily mean that there was a failure on the part of the assessee to disclose fully and truly all material facts. In CIT v. K. Mohan & Co. (Exports) [IT Appeal Nos. (Lodg.) 2347 of 2010 & 1263 of 2011, dated 1-7-2011], a Division Bench of this Court dealt with an appeal arising from a decision of the Tribunal cancelling reassessment proceedings initiated by the Assessing Officer beyond a period of four years from the end of the relevant Assessment Year. The assessment was sought to be reopened as a result of a retrospective amendment to Section 80HHC introduced by the Taxation Laws Amendment Act, 2005 with effect from 1 April 1998. The Division Bench held that if the Legislature amends the provisions of the Act with retrospective effect, it cannot be said that there was a failure on the part of the assessee to disclose fully and truly all material facts relevant for the purposes of assessment. A similar view was taken by the Division Bench in its recent judgment dated 24 January 2012 in DIL Ltd. v. Asstt. CIT [2012] 18 taxman.com 290 (Bom.) dealing with the retrospective amendment of Section 115JB by the Finance Act of 2009 with effect from 1 April 2001. The Division Bench noted that clause (i) of Explanation 1 was introduced to include the amount or amounts set aside as provision for diminution in the value of investment. In view of the retrospective amendment of law by Parliament, the Court held that the Assessing Officer may have reason to believe that income has escaped assessment. But that in itself was not held to be sufficient for reopening an assessment beyond a period of four years unless there was a failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment. 10. Rule is accordingly made absolute by setting aside the impugned notice dated 30 March 2011."

7 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation

Thus it was emphasised that unless the failure of the assessee to disclose fully and truly, all material facts could be established, re- opening after 4 years would not be valid. 5.1.7 In the case of Prashant S. Joshi v ITO reported at 324 ITR 154 Bombay High Court held that even if there is no assessment u/s 143(3), reopening u/s 147 is bad if there are no proper ‘reasons to believe’ and that the only reasons that can be considered for reopening are the reasons recorded by the AO. The Court held as follows: "9. Section 147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of Sections 148 to 163, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. The first proviso to section 147 has no application in the facts of this case. The basic postulate which underlines section 147 is the formation of the belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. The Assessing Officer must have reason to believe that such is the case before he proceeds to issue a notice under section 147. The reasons which are recorded by the Assessing Officer for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. For it is on the basis of the reasons recorded and on those reasons alone that the validity of the order reopening the assessment is to be decided. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 that income has escaped assessment, must be determined with reference to the reasons recorded by the Assessing Officer. The reasons which are recorded cannot be supplemented by affidavits. The imposition of that requirement ensures against an arbitrary exercise of powers under section 148." In this judgment, the Hon'ble Court also referred to the observations in the decision rendered in the case of in Hindustan Lever Ltd. V/s. R.B. Wadkar, elaborating that the reasons should be clear and unambiguous. The relevant extract is as follows: "11. The same principle was reiterated in a judgment of the Division Bench of this R Court in Hindustan Lever Ltd. V/s. ,B, Wadkar2 :- "...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 based on reasons not recorded. It is for the AO to disclose an open his mind through reasons recorded by him. He has to speak through his reasons.... The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of

8 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation mind of the AO. The reasons recorded should be self- explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The AO, in the event of challenge to the reasons must be able to justify the same based on material available on record….. The vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the AO cannot be supplemented by filing affidavit of making oral submission, otherwise, the reasons which are lacking in material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.” 5.1.8 Facts in the instant case show that the assessment of the appellant's case was completed u/s 143(3) vide order dated 31/12/2007 after due examination and acceptance of the claim of deduction u/s 10A as is evident from the extract of the said assessment order reproduced in para 5.1.1 earlier. The time limit for reopening such an assessment, without failure on the part of the assessee as specified in the proviso to section147, was within 4 years from the end of the relevant assessment year i.e. 31/03/2010. In the present case however, the AO issued the notice only on 30/03/2012. Therefore the stipulations contained in the said proviso are attracted as per which in case the original assessment has been made under section 143(3) and four years have elapsed from the end of the relevant assessment year, the assessment can be reopened only on the ground of failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment. The reasons recorded as provided to the appellant as discussed in para 5.1.2 earlier make it evident that the AO has not brought on record anything to establish failure on the part of the appellant to disclose material facts. Accordingly, the reopening in this case cannot be held as valid and the impugned assessment is therefore quashed. The ground raised by the appellant is therefore allowed. 5.2 In Grounds No. 3 and 4, the appellant has challenged the disallowance of the claim u/s 10A on merits. As noted earlier, the assessment is re-opened purely on the basis of the denial of the claim u/s 10A in a subsequent assessment year. It is also noted that the claim for deduction was duly allowed in the original assessment order passed u/s 143(3) after verification of details submitted by the appellant and the return filed for the year under consideration. In view of the fact that the appellant's claim for deduction u/s 10A for A.Y. 2009-10, has been allowed vide appeal order no. CIT(A)-31/IT-371/ITO-20(3)(1)/11-12 dated 07/03/2013 and that the impugned order reflects no other reason for the reopening of the assessment than the disallowance of the claim u/s 10A for A.Y. 2009-10, the disallowance made is deleted on merits also and the ground raised by the appellant is allowed. 6. In the result the appeal is allowed.

9 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation A.Y. 2006-07 7. The common grounds raised by the appellant have already been reproduced in para 2 of this common order earlier. The facts of the case for the year under consideration are that the appellant, a firm, filed its return of income for A.Y. 2006- 07 on 31/10/2006 declaring total income of Rs. Nil after claiming deduction of 46,03,760/- u/s 10a. The return was processed and selected for scrutiny and assessment was completed u/s 143 (3) vide order dated 17/12/2008 accepting the returned income. Subsequently the assessment was reopened by issue of notice u/s 148 on 30/03/2012 and assessment was completed vice order 18/03/2013 u/s 144 r.w.s 147 withdrawing the exemption u/s 10A and assessing total income at Rs. 46,03,760/-. The present appeal is filed against the said assessment order. As stated earlier, the grounds of appeal, statement of facts and written submissions made in this year are similar to those for A,Y, 2005-06. 7.1 In view of the similar facts and circumstances, the Grounds No.1 to 4 raised by the appellant for this year are allowed following the detailed reasoning given for A.Y. 2005-06. 8. In the result, both the appeals for A.Y. 2005-06 and 2006-07 are allowed.” 2.4 Similarly, in the impugned order for A.Y. 2007-08 and 2008-09 the learned CIT(A) has allowed the assessee’s appeal on both the technical grounds challenging the validity of reopening the assessment under section 147/148 of the Act, and of the orders of assessment as well as on the merits of the assessee’s claim for deduction under section 10A of the Act, holding as under at paras 5 to 7 as under: - “5. In the present appeal, the appellant has challenged the validity of the reopening and the disallowance of deduction u/s 10A. I have carefully considered the facts relating to the said ground as they emanate from the impugned assessment order and the submissions made during these proceedings. 5.1 In Ground Nos. 1 and 2, the appellant has challenged the reopening of assessment in the present case as bad in law. It has been submitted that as per the provisions of the Act, reopening of an assessment is possible only when there is formation of belief by the AO that income has escaped assessment. In the present case, it is submitted that the appellant had disclosed all particulars relating to the claim u/s 10A. It is further stated that the re-opening of the assessment has been done only on the basis of the denial of the claim u/s 10A for A.Y. 2009-10 and that there is nothing to show that the appellant had not made a full or complete disclosure of the material facts or that the AO was in possession of any information indicating escapement of income.

10 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation 5.1.1 In the impugned assessment order, the reasons recorded for reopening of assessment are as follows: "In this case the original return of income was filed on 30.10.2005 showing total income at Rs. Nil. Assessee has claimed exemption u/s 10 but during assessment proceedings for A. Y. 2009-10, it was noticed that the claim is not genuine." Thus the sole basis for reopening the assessment in the present case is the disallowance of the appellant's claim during the assessment for A.Y. 2009-10. 5.1.2 Under section 147, the primary condition to be satisfied is that the Assessing Officer must have 'reason to believe' that income chargeable to tax has escaped assessment and it must not be a mere change of opinion on which re-assessment is initiated. 5.1.3 In the case of Prashant S. Joshi v ITO reported at 324 ITR 154 the Bombay High Court held that even if there is no assessment u/s 143(3), reopening u/s 147 is bad if there are no proper ‘reasons to believe’ and that the only reasons that can be considered for reopening are the reasons recorded by the AO. The Court held as follows: "9. Section 147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of Sections 148 to 163, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. The first proviso to section 147 has no application in the facts of this case. The basic postulate which underlines section 147 is the formation of the belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. The Assessing Officer must have reason to believe that such is the case before he proceeds to issue a notice under section 147. The reasons which are recorded by the Assessing Officer for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. For it is on the basis of the reasons recorded and on those reasons alone that the validity of the order reopening the assessment is to be decided. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 that income has escaped assessment, must be determined with reference to the reasons recorded by the Assessing Officer. The reasons which are recorded cannot be supplemented by affidavits. The imposition of that requirement ensures against an arbitrary exercise of powers under section 148." In this judgment, the Hon'ble Court also referred to the observations in the decision rendered in the case of in Hindustan Lever Ltd. V/s. R.B. Wadkar, elaborating that the reasons should be clear and unambiguous

11 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation

"11. The same principle was reiterated in a judgment of the Division Bench of this Court in Hindustan Lever Ltd. V/s. R,B, Wadkar2:- "...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 based on reasons not recorded. It is for the AO to disclose an open his mind through reasons recorded by him. He has to speak through his reasons.... The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the AO. The reasons recorded should be self- explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The AO, in the event of challenge to the reasons must be able to justify the same based on material available on record.... That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the AO cannot be supplemented by filing affidavit of making oral submission, otherwise, the reasons which are lacking in material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.” 5.1.4 In the decision rendered in the case of CIT v Sfil Stock Broking Ltd. reported at 325 ITR 285, the Hon'ble Delhi High Court adjudicated upon a case where reopening of an assessment was held to be unjustified since the reasons recorded did not show any application of mind by the AO. The Court held as follows: “9. In the present case, we find that the first sentence of the so-called reasons recorded by the Assessing Officer is mere information received from the Deputy Director of Income-tax (Investigation). The second sentence is a direction given by the very same Deputy Director of Income-tax (Investigation) to issue a notice under section 148 and the third sentence again comprises of a direction given by the Additional Commissioner of Income-tax to initiate proceedings under section 148 in respect of cases pertaining to the relevant ward. These three sentences are followed by the following sentence, which is the concluding portion of the so-called reasons: “Thus, I have sufficient information in my possession to issue notice under section 148 in the case of M/s. SFIL Stock Broking Ltd. on the basis of reasons recorded as above.” From me above, it is clear that the Assessing Officer referred to the 10. information and the two directions as "reasons" on the basis of which he was proceeding to issue notice under section 148. We are afraid that these cannot be the reasons for proceeding under section 1471148 of the said Act. The first part is only an information and the second and the third parts of the beginning paragraph of the so-called reasons are mere directions, From the so-called reasons, it is not at all discernible as to whether the Assessing Officer had app/led his mind to the in formation and independently arrived at a belief that, on the basis of the material which he had before him, income had escaped assessment. Consequently, we find that the Tribunal has arrived at the correct conclusion on the facts. The law is well settled. There is no substantial question of law which arises for our consideration. The appeal is dismissed." 11.

12 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation 5.1.5 The reasons recorded for the reopening of the assessment for the year under consideration as reproduced in para 5.1.2 are vague and do not demonstrate any nexus to escapement of income during the year under consideration. The fact of disallowance of a claim in a subsequent year cannot by itself be held to be sufficient to show that the appellant had not fulfilled conditions required to claim deduction u/s 10A during the year under consideration and that the income has escaped assessment during the said year. The reasons recorded do not show any application of mind by the AO. Accordingly, the reopening in this case cannot be held as valid and the impugned assessment is therefore quashed. The grounds raised by the appellant are therefore allowed. 5.2 In Grounds No. 3 and 4, the appellant has challenged the disallowance of the claim u/s 10A on merits. As noted earlier, the assessment is re-opened purely on the basis of the denial of the claim u/s 10A in a subsequent assessment year. In view of the fact that the appellant's claim for deduction u/s 10A for A.Y. 2009-10, has been allowed vide appeal order CIT(A)-31/IT-371/ITO-20(3)(1)/11-12 dated 07.03.2013 and that the impugned order does not contain any new facts, the disallowance made is deleted on merits also and the grounds raised by the appellant is allowed. A.Y. 2008-09 6. The common grounds raised by the appellant have already been reproduced in para 2 of this common order earlier. The facts of the case are that the appellant a firm, filed its return of income for A.Y. 2006-07 on 31/10/2006 declaring total income of Rs. Nil after claiming deduction of 46,03,760/- u/s 10A. The return was processed and selected for scrutiny and assessment was completed u/s 143 (3) vide order dated 17/12/2008 accepting the returned income. Subsequently the assessment was reopened by the issue of notice u/s 148 on 30/03/2012 and assessment was completed vide order dated 18/03/2013 u/s 144 r.w.s 147 withdrawing the exemption u/s 10A and assessing total income at Rs. 46,03,760/-. The present appeal is filed against the said assessment order. As stated earlier, the grounds of appeal, statement of facts and written submissions made in this year are similar to those for A.Y. 2007-08. 6.1 In view of the similar facts and circumstances, the Grounds No.1 to 4 raised by the appellant for this year are allowed in view of the detailed reasoning given for A.Y. 2005-06. 7. In the result, both the appeals for A.Y. 2007-08 and 2008- 09 are allowed.” 3.1 Aggrieved by the order of the CIT(A)-31, Mumbai dated 21.07.2014 for assessment years 2005-06 to 2008-09, Revenue has preferred these appeals raising the following identical grounds for all the four assessment years: -

13 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation “1. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in quashing the reopening u/s 147 of the Income Tax 1961 on unlawful grounds. 2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing the assessee’s appeal on technical ground and not on the merit of the case. 3. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in not appreciating that the assessee has declared very high and abnormal profit and claimed it as exempt u/s 10A. 4. The appellant prays the of the learned CIT(A) on the above ground may be set as aside and allow appellant’s appeal. 5. The appellant craves leave to amend or alter any ground or to submit additional new ground which may be necessary.” 3.2 The learned D.R. for Revenue was heard and placed support and reliance on the grounds raised and also the finding of the AO in the orders of assessment for assessment years 2005-06 to 2008-09. 3.3.1 Per contra, the learned A.R. for the assessee supported the impugned orders of the learned CIT(A) for assessment years 2005-06 to 2008-09, on both the findings rendered on technical issues of the validity of the proceedings initiated under section 147/148 of the Act in quashing of the orders of assessment for these years, as well as on the merits of the assessee’s claim for deduction under section 10A of the Act. At the outset the learned A.R. for the assessee submitted that the basis for reopening the assessments for these four assessment years was admittedly the finding rendered by the AO in the order of assessment for A.Y. 2009-10 that the assessee’s claim for deduction under section 10A of the Act was not genuine. In this regard, the learned A.R. for the assessee brought to the notice of the Bench that a Coordinate Bench of this Tribunal in the assessee’s case for A.Y. 2009-10, in its order in ITA No. 3941/Mum/2013 dated 11.12.2015, has upheld the order of the CIT(A) granting the assessee its claim for deduction under section 10A of the Act. Contending that the activities of the assessee firm for assessment years 2005-06 to 2008-09 were similar to the activities carried on in A.Y. 2009-10 wherein the assessee’s claim for deduction under section 10A of the Act is now held to be in order by the order of the ITAT for A.Y. 2009-10 (supra), the learned

14 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation A.R. argued that the basis for reopening of the impugned assessment years, i.e. the denial of the assessee’s claim for deduction under section 10A of the Act for A.Y. 2009-10, being struck down, Revenue’s appeals have no legs to stand on; both on the technical grounds of the validity of reopening the assessment for assessment years 2005-06 to 2008-09 and the validly of the resultant orders of assessments plus on merits also, as the assessee’s claim for deduction under section 10A of the Act is to be allowed. It is prayed that in these factual and legal matrix of the case, Revenue’s appeals for assessment years 2005-06 to 2008-09 are liable to be dismissed. 3.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncement cited. Admittedly as seen from the reasons recorded for initiation of proceedings under section 147 of the Act for assessment years 2005-06 to 2008-09 (supra) was that since the assessee’s claim for deduction under section 10A of the Act for A.Y. 2009-10 was found to be not genuine, the assessment for the aforesaid four assessment years were required to be reopened for examining the assessee’s claim for deduction under section 10A of the Act. It is a matter of record that the said reassessment orders for assessment years 2005-06 to 2008-09 dated 18.03.2013 were passed disallowing the assessee’s claim for deduction under section 10A of the Act. On appeal, the learned CIT(A) in the impugned orders for assessment years 2005-06 to 2008-09 dated 21.07.2014 allowed the assessee’s appeals both on the technical grounds challenging the validity of proceedings under section 147/148 of the Act and the validity of the consequent orders of assessment by quashing them and also on merits, of the assessee’s claim for deduction under section 10A of the Act being in order. 3.4.2 As submitted by the learned A.R. for the assessee, we find that a Coordinate Bench of this Tribunal in its order in ITA No. 3941/Mum/2013 dated 11.12.2015 in the assessee’s own case for A.Y. 2009-10 has upheld the order of the learned CIT(A) in allowing the assessee’s claim for

15 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation deduction under section 10A of the Act as the assessee satisfied the conditions of eligibility to claim the said deduction. At paras 2 to 4 of its order, the Coordinate Bench has considered this issue and held as under:- “2. The Revenue has taken the following grounds of appeal: "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing to allow exemption u/s. 10A of I.T. Act, 1961 without appreciating that neither A.O. nor CIT(A) has done any comparative study about the genuineness and reasonableness of expenses and profit earned. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that the assessee has declared very high and abnormal profit and claimed it as exempt u/s 10A, this aspects needs detailed investigation especially in view of the fact that USA firm and the assessee has common direct control jointly by one individual and his relatives. 3. The appellant prays that the order of Ld.CIT(A) on the above ground be set aside and matter be restored to the Assessing Officer. 4. The appellant craves leave to amend or to alter, any ground or add a new ground, which may be necessary." 3. The brief facts of the case are that during the assessment proceedings, the Assessing Officer (hereinafter referred to as the AO) observed that the total expenses of the assessee for the year under consideration were Rs.2.34 crores as against income received of Rs.7.04 crores and thus the assessee showed a high net profit ratio. The AO further noted that the assessee had only one client M/s Unno Source Corporation USA which was owned by Mr. Pranav Gundaria and his wife and Mr. Janak Bhalaria and his wife. On examining the monthly usage of telephone/internet by the assessee, the A.O concluded that the assessee had incurred paltry expenses and that it was not possible to generate a turnover of Rs.7.04 crores based on the incurring of such expenses. The AO also noted that as per transfer pricing report, the number of employees of the assessee concern was 80 but the salary register showed only 52 and observed that the assessee had not been able to prove the technical competence of any of the workers who provided the IT enabled services for civil engineering. The AO also took exception to the expenses incurred by the assessee towards foreign travel, partner's remuneration, depreciation on office premises, purchase of iPhone etc. The AO also observed that the salary paid to employees was within the range of Rs.11,000/- to Rs.15,000/- in the city of Mumbai. The AO then concluded that no actual business was done and the entire set up was created to claim tax-free income in India and therefore proceeded to deny the exemption claimed by the assessee u/s 10A. Being aggrieved by the order of the AO, the assessee preferred appeal before the Ld. CIT(A). The assessee made a detailed submission in support of its claim and also furnished the additional evidences as mentioned in para 4.2 of the impugned order. The Ld. CIT(A) forwarded the said evidences to the AO for verification and comments. The AO thereafter conducted the investigation in respect of the evidences submitted by the assessee and came to the following conclusion: “The firm has produced voluminous data regarding drawings in paper form and softcopy in form of 9 CDs. The said CDs has been verified by me and to the best of my knowledge the same contains drawings, and work of clients of the assessee firm. The firm was registered with STPI and has produced returns filed with the STPI. The assessee firm has produced

16 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation purchase of various soft-wares which are useful requirement in the line of designing like Tekla Software, CAD/CAM Software etc., The firm has filed client wise, project wise, date wise, inbound and outbound use of Internet space. The firm uses cost effective MTNL triband facility which is much cheaper than other options. As regards various expenses the firm has produced various Internet connection bills of MTNL, TATA etc., which has been used for the business. As regards, salary to staff it is seen that the assessee has 2 units one at Mumbai and at Nasik, total strength of the firm in human resource is totaling to about 88 employees. From the details of employees and qualifications, it is seen that the employees are all qualified to do the requisite firms work." Relying upon the remand report of the AO, the Ld. CIT(A) allowed the claim of the assessee observing that the assessee had satisfied the conditions for eligibility to claim exemption under section 10A of the Act. He has observed that the assessee’s claim has also been allowed for the two assessment years following its inception. The assessee has duly proved by various evidences that the business was actually carried out by the assessee and that there were 88 employees employed by the assessee and they were having the requisite expertise and qualification required for the work of the assessee and that the assessee had actually carried out the business during the relevant financial year. All the claims have been duly verified by the AO and in view of this, he deleted the addition. 4. We do not find any infirmity in the order of the Ld. CIT(A) arrived at after consideration of the relevant facts and the evidences submitted which is also based on the verifications conducted by the AO during the remand proceedings. The order of the Ld. CIT(A) is therefore upheld.” 3.4.3 In our view, in the light of the findings rendered by the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2009-10 in ITA No. 3941/Mum/2013 dated 11.12.2015 upholding on merits the eligibility of the assessee’s claim for deduction under section 10A of the Act for A.Y. 2009-10, the basis upon which the AO recorded the reasons for reopening the assessments for assessment years 2005-06 to 2008-09 (extracted supra), being struck down, does not now survive thereby rendering the reasons recorded for the aforesaid four assessment years unsustainable both in law and on facts. In this view of the matter, we find no merit in the grounds raised by Revenue on this count and uphold the quashing of the reassessment orders for assessment years 2005-06 to 2008-09 dated 18.03.2013 for being unsustainable in law. Further, following the decision of the Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2009-10 dated 11.12.1015 (supra), we also uphold the orders of the CIT(A) in allowing the assessee’s claim for deduction under section 10A of the Act for assessment years 2005-06 to 2008-09 on merits. It is accordingly

17 ITA Nos. 5656 to 5659/Mum/2014 M/s. Unnosource Corporation ordered. Consequently, finding Revenue’s grounds at S.Nos 1 to 5 for the aforesaid four assessment years as being devoid of merit, the same are dismissed. 4. In the result, the Revenue’s appeals for assessment years 2005-06 to 2008-09 are dismissed. Order pronounced in the open court on 8th July, 2016. Sd/- Sd/- (Sandeep Gosain) (Jason P. Boaz) Judicial Member Accountant Member

Mumbai, Dated: 8th July, 2016

Copy to:

//True Copy// Assistant Registrar ITAT, Mumbai Benches, Mumbai n.p.