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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
Before: SHRI A.T. VARKEY & SHRI PRASHANT MAHARISHI
PER A.T. VARKEY, JUDICIAL MEMBER :
These are cross appeals filed by the revenue and the assessee against the order of the Commissioner of Income-tax (Appeals)-XXXIII, New Delhi dated 24.06.2013 for the assessment year 2004-05.
2 ITA No.5611 & 5581/Del/2013
From the assessment order, we find that the assessee company had filed return
declaring NIL income on 30-10-2004. Gross total income before claiming deduction
under Chapter VI of the Income Tax Act, 1961 (hereinafter ‘the Act’) was declared at
Rs.90,22,42,282/-. Claim of deduction under section 80IC of the Act was made at
Rs.97,37,28,085/ which was restricted to total income, hence the Nil taxable income.
The provisions of section 115JB were applied on the declared book profits of
Rs.67,08,71,105/ and the assessee company paid Minimum alternate tax of
Rs.5,16,76,089/ .
Assessment under section 143(3) of the Act was completed on 28.12.2006 at an
income of Rs.60,75,16,480/- by making addition of Rs.1,00,00,000/- on account of
disallowance of advertisement expenses, Rs.8,48,033/- on account of foreign travel
expenses, Rs.24,50,893/- on account of bad debts and Rs.27,98,173/- on account of
repair and maintenance. Deduction under section 80IC was also restricted to
Rs.31,10,33,397/-.
On an application dated 09.01.2007 filed by the assessee company before the
CIT-IV, New Delhi for revision of the assessment order, the assessment order was set
aside vide order dated 29.01.2007 passed under section 264 of the Act. Pursuant
thereto, assessment was reframed on 28.03.2007 at an income of Rs.3,57,82,200/
wherein claim of deduction under section 80IC was allowed at Rs.85,59,98,358/-. In
computing the income, disallowances of Rs.2,00,000/- under section 14A,
Rs.4,31,154/- on account of foreign travel expenses and Rs.2,50,500/- on account of
ROC charges were made. In an appeal filed by the assessee, disallowance of ROC fee
was deleted by the CIT(Appeals).
3 ITA No.5611 & 5581/Del/2013
During the year under consideration, the assessee company was engaged in the
business of 'manufactures and traders' in Pan Masala, Gutkha, Zarda, Perfumery
Compounds & Herbs, Mouth Freshener, Salt & Spices, Snack foods, Natural Spring
Water, Tea, Rice, Composite Cans and processing of silver. Apart from this, the
assessee company was also engaged in the business of trading in securities and units of
mutual funds. Manufacturing units of the company are located at Noida (UP),
Barotiwala (HP), Agartala, Guwahati and Delhi. For the year under consideration, the
sales were declared at Rs.5,98,28,58,879/- as compared to Rs.4,70,16,48,293/- in the
immediately preceding year and profits before taxes amounting to Rs.67,32,63,987/- as
against Rs.34,54,64,291/- in the immediately preceding year had been declared. 6. On 21.01.2011, a search & seizure operation under section 132 of the Act was
carried out in the case of M/s Dharampal Satyapal Ltd, and other group concerns /
individuals. In the course of search operation, production units of the DS group situated
in the North Eastern States, namely, Guwahati & Agartala were also covered under
section 132 / 133A. On the strength of these production centers, DS group companies
were claiming deduction under section 80IC of the Act. Pursuant to search, according
to Department, certain facts had emerged which suggested that the claim of deduction
under chapter VIA made by the DS group companies was grossly inflated.
According to the Department, findings of the search proceedings suggested that
functions performed at Guwahati were that of drying up of processed beetle nut
(processed supari) received from head office, Noida and packing is done. All the raw
materials, namely, catechu, beetle nut, cardamom and sugahdi were procured at head
office situated in Noida. Catechu (katha) is procured and processed at Noida.
Cardamom was procured and its seeds were extracted from the shell. Beetle nut (supari)
was also procured at Noida and then chopped into smaller pieces and processed.
4 ITA No.5611 & 5581/Del/2013
Various other ingredients were also received from head office at Noida. This mixture
was then packed and dispatched to destination ordered by head office.
The AO takes note of an information which he received from Investigation
Wing in para 7 of his order that the assessee company has claimed excessive deduction
under section 80IC of the Act by attributing entire value addition to the Guwahati unit,
being the eligible unit and thereby contravening the provisions of section 80IA(8) of
the Act, by not transferring the goods and services held for the purpose of the eligible
units to any other business carried out by the assessee and vice versa at the market
value of such goods and in the process showing more than normal profits of the eligible
undertaking and so, reassessment proceedings under section 147 of the Act were initiated. It is noted in para 8 of the impugned reassessment order of AO that he has
after recording reasons and obtaining due sanction under section 151 of the Act, a
notice under section 147 of the Act dated 29.03.2011 was served upon the assessee
company. The AO takes note that in compliance to the said notice under section 147 /
148, the assessee company filed the same return that was originally filed under section
139(1) of the Act. The reasons recorded for reopening of the assessment proceedings
was sought by the assessee company and was provided to it on 03.06.2011 (however ld.
CIT DR after perusal of the assessment records has stated that the date is 24.04.2011).
The AO in para 9 has noted that the assessee company filed objections to the initiation
of reassessment proceedings vide its letter dated 28.11.2011 which was disposed off by
the AO vide a speaking order dated 05.12.2011. Thereafter, after discussing the profile
of the assessee company and after ordering special audit under section 142(2A) of the
Act, the reassessment was completed and the AO has held that since tax computed
under section 115JB of the Act is lower than the tax computed under the normal
provisions of the Act, therefore, the income was reassessed at Rs.73,89,84,220.
5 ITA No.5611 & 5581/Del/2013
Aggrieved the assessee preferred an appeal before the first appellate authority
raising the legal issue challenging the reopening of the assessment, non-receipt of
143(2) notice and on merits. The ld. CIT (A) rejected the ground raised by the assessee
against reopening by the AO which is discussed on pages 26 to 29 of his impugned
order.
In respect to the ground raised against issuance and non-receipt of notice u/s
143 (2), the CIT (A) repelled the said ground also against the assessee and it is
discussed in page 28 of the impugned order. The ground against non-application of
mind by Addl.CIT and CIT under section 151 of the Act was also rejected by the ld.
CIT (A). Aggrieved by the aforesaid order against the assessee, the assessee has preferred an appeal being ITA No.5581/Del/2013 and the revenue is aggrieved by the
partial relief given to the assessee on merits and filed ITA No.5611/Del/2013.
The assessee has raised the following grounds of appeal :-
“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in assuming jurisdiction u/s 147, more so when jurisdictional conditions as mentioned in section 147 to 151 are not satisfied.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in reopening the impugned assessment U/S 147, more so when the appellant was searched u/s 132 of Income Tax Act, 1961.
That in any case and in any view of the matter, action of Ld. CIT(A) in upholding the reassessment order made by Ld. AO is bad in law and against the facts and circumstances of the case.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in passing the impugned reassessment order, even though notice U/S 143(2) was not served within the statutory allowable period.
That in any case and in any view of the matter, action of Ld. CIT(A) in not quashing the impugned reassessment order framed by Ld. AO is bad in law and against the facts and circumstances of the case,
6 ITA No.5611 & 5581/Del/2013
more so when Ld. CIT(A) himself admitted that the notice u/s 143(2) was not served.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in sustaining the disallowance of Rs.3,895/- out of total disallowance of Rs.20,54,172/- allegedly being prior period expenses, more so when such disallowance could not have been made in the proceedings u/s 147.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition in the value of stock of WIP and has erred in not deleting the entire addition of Rs.2,94,83,915/- and has further erred in not giving direction to adopt enhanced closing stock as opening stock of next year, more so when such addition could not have been made in the proceedings u/s 147.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the disallowance ofRs.1,71,995/- fully, as made by Ld. AO and has further erred in directing the assessing officer to charge the interest to the sister concern at the rate of interest paid on cash credit loan to the bank and to restrict the disallowance to that extent, more so when such disallowance could not have been made in the proceedings u/s 147.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the disallowance of Rs.71,48,144/- fully as made by Ld. AO u/s 14A and has further erred in sustaining the disallowance to the extent of Rs.23,92,882/-, more so when such disallowance could not have been made in the proceedings u/s 147, more so when disallowance was already made in the original assessment order.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the disallowance of Rs.10,28,000/- fully as made by Ld. AO on account of expenses allegedly not supported by bills and has further erred in sustaining the disallowance to the extent of Rs.8,00,000/-, more so when such disallowance could not have been made in the proceedings u/s 147.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making an aggregate adjustment of Rs.16,05,45,924/- to the amount of book profits i.e. Rs.2,30,00,000/- on account of alleged income from sale of investment and Rs.11,99,78,929/- on account of alleged unascertained liability and Rs.1,75,66,995/- on account of alleged diminution of the value of investment, more so when such disallowance could not have been made in the proceedings u/s 147.
7 ITA No.5611 & 5581/Del/2013
That having regard to the facts and circumstances of the case, Ld. CIT( A) has erred in law and on facts in not reversing the action of Ld. AO in making addition of Rs.5,49,33,161/- and more so when the impugned addition could not have been made in the proceedings u/s 147 and more so when burden to prove the addition u/s 801A(8) and 801A(10) was on the revenue which has not been discharged and has further erred in observing as under:-
(a) Ld. CIT(A) directing to Ld. AO in estimating the profit margin @ 2% instead of @ 10% on the value of goods transferred which are not processed at all and not allowing the deduction u/s 801B/801C in this regard.
(b) Ld. CIT(A) has erred in confirming the action of Ld. AO in loading of manufacturing expenses at the estimated rate of 37.85% and charging of profit margin @ 10% on the amount of goods called Kathha (Catechu) which gets processed through job worker and not allowing the deduction u/s 801B/801C in this regard. (c) Ld. CIT(A) has erred in confirming the action of Ld. AO in loading of manufacturing expenses at the estimated rate of 37.85% and charging of profit margin @ 10% on the amount of goods called Cardamom (Elaichi) and not allowing the deduction U/S 801B/801C in this regard.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.1,16,39,096/- on the ground that 'can pack' transferred from 'can pack' division to eligible units have not been transferred at market value and that too placing reliance on the working of special auditor and has further erred in not granting the benefit of deduction u/s 80IB/80IC in this regard, more so when the impugned addition could not have been made in the proceedings u/s 147 and more when burden to prove the addition u/s 80IA(8) and 80IA(10) was on the revenue.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in directing the Ld. AO to rework the value of royalty and profit margin of 10% should be loaded on such royalty paid.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.1,30,10,138/- u/s 80IA(8) on the ground that royalty attributable to the usage of brand "Rajnigandha" has not been charged from the eligible undertakings, more so when the impugned addition could not have been made in the proceedings u/s 147
8 ITA No.5611 & 5581/Del/2013
and more when burden to prove the addition u/s 80IA(8) and 80IA(10) was on the revenue.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.37,05,S97/- u/s 80IA(10) in respect of job charges payable to M/s Flosyn Fragrances and M/s Swastik Enterprises, more so when the impugned addition could not have been made in the proceedings u/s 147 and more when burden to prove the addition u/s 80IA(8) and 80IA(10) was on the revenue.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in rejecting the audit report u/s 10CCB and that too without any basis and merely on the basis of surmises and conjectures.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the disallowances made in the claim of appellant under section 80IA/80IC and has erred in not allowing the deduction under these sections on the amount added/disallowed.
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in passing the reassessment order beyond the limitation period and thus reassessment order is barred by limitation.
That in any case and in any view of the matter, impugned additions/disallowances and impugned assessment order are bad in law, illegal, unjustified, barred by limitation, contrary to facts & law and based upon recording of incorrect facts and finding, without giving adequate opportunity of hearing, in violation of principles of natural justice and the same deserves to be quashed.
That in any case and in any view of the matter action of Ld. A.O in framing the impugned assessment order is contrary to law and facts, void ab initio, beyond jurisdiction and the same is not sustainable on various legal and factual grounds
That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest 234B and 234D of the Income Tax Act, 1961.
That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”
9 ITA No.5611 & 5581/Del/2013
The grounds of appeal raised by the revenue read as under :-
“1. On the facts and in the circumstances of the case, the CIT (A) has erred in rejecting the reduction in eligible profit of Rs.55,19,975/- out of total reduction of Rs.5,49,33,1611-, made by the AO by increasing the value of goods transferred from NOIDA units to eligible units treating them processed goods and by reducing the SOIB/SOIC to that extent in spite of the fact that the CIT(A) has confirmed the action of AO of loading of average manufacturing expenses of 37.S5% and charging profit @ 10%.
On the facts and in the circumstances of the case, the CIT (A) has erred in directing the AO to calculate royalty @ 2.5% of raw material without excise duty as against the rate of 3% approved by the Ministry of Company Affairs in respect of goods transferred from 'perfumery division' to eligible units which resulted in increase of profit eligible for deduction u/s 80IB/80IC of the Act to that extent.
On the facts and in the circumstances of the case, the CIT (A) has erred in rejecting the reduction in eligible profit of Rs.1,09,32,042/- made by the AO on account of depreciation on fixed assets of corporate office which resulted in increase of profit eligible for deduction u/s SOIB/SOIC of the Act to that extent.
On the facts and in the circumstances of the case, the CIT (A) has erred in rejecting the reduction in eligible profit of Rs.9,47,79,501/- made by AO by taking into consideration the fair market value of the services obtained by eligible units from the corporate offices, depot and branches etc. which resulted in increase of profit eligible for deduction u/s 80IB/80IC of the Act to that extent.
On the facts and in the circumstances of the case, the CIT (A) has erred in directing the AO to allow set off of loss of Rs.2,68,80,136/- & Rs.11,42,403/- respectively for Guwahati & Tripura units eligible for deduction u/s 80IB/80IC with the profit of non eligible units.
On the facts and in the circumstances of the case, the CIT (A) has erred in directing the AO to grant deduction u/s 80IB/80IC on the refund of excise duty of Rs.56,96,17,646/- of which immediate source is not manufacturing.
On the facts and in the circumstances of the case, the CIT (A) has erred in deleting disallowance of Rs.20,40,277/-, out of total addition of Rs.20,54,172/- made by the AO on account of prior period expenses.
On the facts and in the circumstances of the case, the CIT (A) has erred in deleting addition of Rs.2,94,83,915/- made by the AO on account of increase in the value of stock of work in progress, finished goods and unpacked goods.
10 ITA No.5611 & 5581/Del/2013
On the facts and in the circumstances of the case, the CIT (A) has erred in deleting disallowance of Rs.47,55,262/-, out of total addition of Rs.71,48,144/- made by the AO on account of 14A of the Income Tax Act, 1961.
The order of the CIT (A) is erroneous and is not tenable on facts and in law.
The appellant craves leave to add, alter or amend any of the grounds of appeal before or during the course of the hearing of the appeal.”
First, we will deal with the assessee’s appeal. The ld. AR filed the written
synopsis which are reproduced below for the sake of clarity of legal issues :-
“1. The original assessment in this case was completed u/s. 143(3) vide order dtd. 28/12/2006 at an income of Rs. 60,75,16,480/-. The statutory deduction u/s. 80IC claimed in the original return at Rs. 97,37,28,085/- on the basis of certificate of statutory auditor in Form No. 10CCB was restricted to Rs. 31,10,33,397/-. In support of above position, para 2 of the assessment order is extracted hereunder: 2. Assessment u/s. 143(3) of the Income Tax Act was completed on 28/12/2006 at an income of Rs.60,75,16,480/- by making addition of Rs.1,00,00,0007- on account of disallowance of advertisement expenses, Rs.8,48,033/- on account of foreign travel expenses, Rs.24,50,893/- on account of bad debts and Rs.27,98,1737- on account of repair and maintenance. Deduction u/s. 80IC was also restricted to Rs.31,10,33,397/-. 2. Subsequently, CIT-IV, New Delhi passed order u/s. 264 on 29/01/2007 and in pursuance to direction of the C1T, the assessment was reframed on 28/03/2007 and the claim of statutory deduction u/s. 801C was recomputed at Rs.85,59,98,358/- and income was recomputed at Rs.3,57,82,200/-. (para 3 of the assessment order). 3. On an application dated 09-01-2007 filed by the assessee company before the CIT-IV, New Delhi for revision of the assessment order, the assessment order was set aside vide order dtd. 29-01-2007 passed u/s. 264 of the Income Tax Act. Pursuant thereto, "assessment was reframed on 28-03-2007 at an income of Rs.3,57,82,200/- wherein claim of deduction u/s. 80IC was allowed at Rs.85,59,98,358/-. 3. It has already been clarified that statutory claim u/s 80IC is being allowed since AY 2000-01 and claim in the year under consideration during the original proceedings was considered and accepted on the basis of past accepted history.
11 ITA No.5611 & 5581/Del/2013
Subsequently, notice u/s.148 was issued on 25/03/2011 on the basis of reasons recorded by ACIT, Circle 10(1), New Delhi, the relevant reasons are extracted hereunder : “25/03/2011 The assessee filed its return of income on 30.10.2004 after at a NIL income under normal provisions of the Act and at a sum of Rs.67,08,71,105/- u/s. 115JB of the Act. After completion of assessment proceedings, the assessee company was assessed at Rs.3,57,82,200/- under normal provisions of the Act and Rs.67,08,71,105/- u7s. 115JB of the Act. During the course of search & seizure operation conduced at the group companies of the assessee on dtd. 21/01/2011 it was noticed that the assessee company follows processing of Pan Masala as per Annexure 'A'. In the flow chart, the entire process has been segregated into stage A to stage H. not a single stage 7 process which is very crucial in the preparation of pan masala (Rajnigandha), is performed at Guwahati. Key ingredients of the Rajnigandha Pan Masala are as follows:- i) Catechu (Katha) ii) Beetle nut (Supari) iii) Cardamom Seed (Elaichi Seed) iv) Sugandhi.
During the course of search, it was noticed that functions performed at Guwahati are that of drying up of processed Beetle Nut (processed supari) received from Head Office, Noida and packing. All the raw materials, namely, catechu, beetle nut, cardamom and sugandhi are procured at head office situated in Noida. Catchcu (katha) is procured and processed at Noida, cardamom is procured and its seeds are extracted from the shell, beetle nut (supari) is procured at Noida, then chopped into smaller pieces & processed and other materials too are procured at Noida. At Guwahati, processed supari is dried in the ovens, and mixed with various ingredients received from Head Officer at Noida. This mixture is then packed and dispatched to destination ordered by the Head Office. It appears that assessee is attributing the entire value addition to the Guwahati to claim higher amount of deduction u/s. 80IC. By doing so the assessee is contravening the provisions of sub-section (8) of section 80IA of the IT Act, 1961 which are relevant for the purpose of computation of deduction u/s. 80IC of the Act. As such the findings of the search proceedings suggests that excess quantum of deduction u7s. 80IC have been claimed by the assessee in his return of income. Thus the income chargeable to tax has escaped assessment for the A.Y, 2004-05, I am also satisfied that the income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment with regard to the assessment year under consideration. Asstt. CIT, Circle 10(1) New Delhi.”
12 ITA No.5611 & 5581/Del/2013
Since the original assessment was completed u/s 143(3) and the notice u/s 148 was issued beyond four years, the proviso to section 147 is applicable in the present case. Further, there is no allegation in the reasons that there was any omission or failure on part of the assessee in disclosing true and full particulars of income and as such the reassessment proceedings are not in conformity with proviso to section 147. For ready reference, proviso to section 147 which is extracted hereunder: Proviso to Section 147 Provided that where an assessment under sub-section f? i 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 subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts^ necessary for his assessment for that assessment year. 6. In the reasons, there is no reference to any fresh tangible material so as to justify reopening u/s 147 of the Act. It will be appreciated that the issue of claim of deduction u/s 80IC was examined in great detail at the time of original assessment and assessment pursuant to order u/s 264 after examining various replies and details filed during the course of assessment and as such the impugned reassessment proceedings are merely on account of change of opinion. The CIT(A) at Page 18 Para 4.4.3 has taken note of various communications and relevant details in relation to issue of claim u/s 80IC during original assessment proceedings : Page 18 Para 4.4.3 (CIT(A)'s Order) Ld. AR argued on the basis of following documents that the assessee has disclosed all material facts regarding deduction u/s 80IC earlier proceedings u/s 143(3)/264 or appellate proceedings: " Following pleadings and evidences would show that the issue of deduction u/s 80IC was extensively considered in original assessment passed u/s 143(3) dated 28-12-2006 (PB 177-186 at PB 178-182) and in the assessment order passed u/s 143(3)/264 dated 28.03.2007 (PB 300-310 at 303-308). It is important to submit that there was even a revision order u/s 264 dated 29- 01-2007 (PB 187-198 at 187-190) on this issue. 1. PB 59-62 at 59-60 is questionnaire dated 13.01.2006 from Learned Assessing Officer issued in original assessment u/s 143(3) asking about procurement of raw material from different units/divisions and about deduction u/s 80IC, excise duty. 2. PB 63-85 is assessee's letter dated 02/02/2006 giving details of inter unit transfers and that Delhi office has no role in procurement process and detailed explanation on section 80IC and about income from
13 ITA No.5611 & 5581/Del/2013
eligible and non-eligible units, excise duty paid in Guwahati and Agartala units in peculiar circumstances and about royalty payment to M/s Flosyn Fragrances (P) Ltd. Excise notifications together with annexure 'A', 'B’ (PB 74-76,77-81, 82- 85) 3. PB 86-93 at 86-87 is copy of letter dated 10-02-2006 submitting about excise duty refund in respect of Guwahati Unit and its relevance for deduction u/s 80IC together with Annexure 'A". 'B' (PB-90-91, 92- 93). 4. PB 94-12-1 is copy of assessee's reply dated 22-02-2006 filed to Ld. AO explaining unit wise sales, nature of unit wise expenses and profit of various units, unit wise wastage together with all annexure of this letter 5. PB 125-133 is letter dated 09-03-2006 together with all its annexures showing unit wise stock, party wise details of job work. 6. PB 134-135 is letter dated 10-11-2006 giving detailed note on deduction u/s80IC 7. PB 136-138 is letter dated 20-11-2006 explaining about movement of raw material and other inputs from various units. 8. PB 139-1-141 is letter dated 27-11-2006 explaining about transfers from one unit to another. 9. PB 316 is a table prepared to show that contentions raised in the reason recorded are the ones relating to which submissions were made in the original assessment proceedings u/s 143(3), 264, 143(3)7264, 250/143(3)/264. 10. PB 921-922 Copy of assessee's reply dated 09-03-2006 filed to Ld. Addl. CIT in assessment proceedings for AY 2004-05 submitting about the manufacturing of pan masala. 11. PB 970-971 Copy of assessee's reply dated 13/04/2009 to Hon'ble CIT(A) for AY 2004-05 Thus, above would show that the issue of deduction u/s 80IC, manner of computation of deduction u/s 80IC, unit wise transfers of material, impact of excise duty on the deduction u/s 80IC and royalty having bearing on the deduction u/s 80IC all have been the subject matter of assessment proceedings, revisional proceeding, reassessment proceeding on earlier occasion. There being nothing found out during the course of search which could have shown any thing adverse to the assessee or different as is clear from the plain reading of the reason recorded, the impugned reassessment is nothing but change of opinion on the same set facts which is not permissible in the eyes of law in
14 ITA No.5611 & 5581/Del/2013
view of the above mentioned catena of judicial decisions and in view of the latest judicial decision from Hon'ble Delhi High Court in the case of CIT vs Usha International Ltd. 348 ITR 485 (Del)(FB) and by Hon'ble Supreme Court CIT vs ICICI Securities Primary Dealership Ltd. 348 ITR 299 (SC). 7. Further, it is relevant and appropriate to make reference to letter dated 13.03.2007 issued by the assessing officer at the time of assessment proceedings pursuant to order u/s 264. As per this letter, the AO has specifically made reference to modus operandi of the assessee along with in-depth note on provisions of section 80IC. The relevant portion of the letter dated 13.03.2007 is extracted hereunder for your kind reference: "MODUS OPERAND! FOR PANMASALA & GUTKA • Set up packaging units at Bumani Maidan Gwvahati • Labour engaged for packaging - 300 (Largely contract workers) • Investment in Plant & Machinery in all the units which are around 8 at Bumani Maidan, Guwahati -10 crores • Process adopted at Guwahati. * Cul Supari is brought from Noida which contributes 80% of raw material (Labour engaged-200) * Grinding of Catechu is also done at Noida and then brought to Guwahati (Labour engaged - 50) * Grinding of Lime is also done at Noida and then brought to Guwahati (Labour engaged - 50) * (All these processing and storage units of Supari Catechu & Lime are at Sector 3, 4 &58, Noida and job workers are also DS Group associate firms and companies) * Perfumery compound is from DS Limited, Perfumery unit at Okhla Industrial Estate, Phase-Ill, New Delhi (Labour engaged- 100) * All these ingredients after cutting/grinding/blending are brought to Guwahati by truck/goods train. * Cut Supari is dried in ovens. * All these ingredients are mixed in 'Rori' Mixers. * Raw tobacco and Kiwam which are also sent from Noida to Guwahati are added in these ingredients, while making Gutka.
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* Pan Masala/Gutka is then packed in lamination pouches/boxes by FFS machines. * PAN Masala/Gutka is then cleared and excise benefit of 300 crores annually availed. " MODUS OPERANDI FOR CHEWING TOBACCO PACKAGING UNITS OF PS GROUP SET UP AT ARUNDHUTI NAGAR, AGARTALA. TRIPURA IN THE NAMES OF PS LIMITED, DHARMAPAL PREM CHAND LIMITED & SATYAPAL SHIVKUMAR • Set up packaging units at Arundhuti Nagar, Agartala. • Labour engaged for packaging - 200 (Largely contract workers) • Investment in Plant & Machinery in all the units which are around 3 at Agartala - 3 Crores. • Process adopted at Agartala * Raw Tobacco is brought from Noida -which contributes 90% raw material (Labour engaged-200 in all units together)
* Perfumery compound is brought from DS Limited, Perfumery unit at Okhla Industrial Estate, Phase-Ill, New Delhi (Labour engaged-100) * Silver leaves is brought from DS Limited Sector-2, Noida (Labour engaged -20) * All these ingredients are brought to Agartala by truck. * All these ingredients are mixed in "Rori 'Mixers
* Manufacture Tobacco is then packed in lamination pouches by FFS machines. * Manufactured Tobacco is then cleared and excise benefit of 200 crores annually availed." 8. From the above, it becomes self-evident that the assessing officer has analyzed and examined the issue of inter unit transfer and manufacturing at Guwahati unit and Agartala Unit in the light of provisions of section 80IC and as such there is absolutely no ground or basis to reopen the completed assessment which has already been thoroughly scrutinized under section 143(3), 264, 143(3) r.w.s. 264 proceedings.
At the time of hearing, the Ld. DR was making allegation that assessing officer did not had any knowledge of inter unit transfer of material and therefore in absence of such crucial piece of information, the assessment was framed erroneously and as such the reopening of assessment is justifiable on this very ground.
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It will be appreciated that the above allegation was misconceived and on the basis of distorted facts used selectively without taking note of detailed investigation carried out during various stages of proceedings. The issue of inter unit transfer and the justification of claim u/s 80IC was duly considered as per details of questionnaire and various submissions extracted above.
In addition to case laws referred to in our earlier submission, reference may also be made to the following latest decision on the issue of reopening u/s 147:
M/s. Swarovski India P. Ltd, v. PCIT (Delhi High Court) [WP(O 1772/20141 (29.09.2015) 16. In the present case, this is exactly what has happened as queries and issues have been specifically raised and answered by the assessee in the original assessment proceedings. Thus, even though the Assessing Officer did not make any addition in the assessment order, it would have to be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make any addition or to reject the stand of the assessee. Consequently, it will have to be presumed that the Assessing Officer had formed an opinion which is now sought to be changed through the re-assessment notice, which cannot be permitted. CIT v. Multiplex Trading & Industrial Co. Ltd. (Delhi High Court) 122.09.20151 34. Thus, although we are in agreement with the contention advanced by the Revenue that information received by the AO regarding passing of bogus entries in its books after the conclusion of the assessment proceedings could in certain circumstances, provide tangible material for AO to reopen assessment and assume jurisdiction, but, in the facts of the present case, we are unable to accept that it would be open for the AO to proceed on the basis that income of the Assessee had escaped assessment on account of the failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment for AY 2001-02. 35. In view of the above, .we find no infirmity with the conclusion of the CIT(A) and the Tribunal that AO could not have assumed jurisdiction to reopen the assessment under Section 147/148 of the Act. Motilal R. Todi v. ACIT (ITAT Mumbai) [22/09/15] (a) Thus, taking help from these judgments, relevant provisions of law, fixing obligations upon the AO for making mandatory compliances, in a step-wise manner, for valid assumption of jurisdiction for reopening and reframing of reassessment order, can be summarized as under:
(i) Availability of the new tangible material indicating escaped income of the assessee, which should have come into possession of
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the AO, after the passing of original assessment order, whether u/s 143(3) or 143(1),
(ii) Recording of the 'Reasons' by the AO: 'Reasons' recorded should not be based upon the change of opinion of the Assessing Officer. 'Reasons' should be such that any person of ordinary prudence should be in a position to make a belief about escapement of income on the basis of facts narrated and material referred to, in the 'Reasons' recorded. The 'Reasons' should show that, there is rational nexus and cause & effect relationship between the material sought to be relied upon in the Reasons and belief sought to be formed by the AO about escapement of income.
(iii) In case reopening is sought to be done by the AO after expiry of four years from the end of the relevant assessment year and the original assessment was framed u/s 143(3) then reasons can be recorded only if there was failure on the part of the assessee in disclosure of material of facts, as has been envisaged in first proviso to section 147. (iv) Before issuing notice u/s 148, the AO has to obtain, on the reasons recorded by him, sanction for reopening of the case, from the competent authority as envisaged u/s 151 viz. Additional Commissioner or the Commissioner of Income Tax, as the case may be. Before granting its sanction, the sanctioning authority is required to record its satisfaction based upon its independent application of mind, making out a case that as per the facts narrated and material referred to in the 'Reasons' recorded by the AO, a belief can be formed about escapement of income and case sought to be reopened is a fit case for reopening u/s 147.
(v) After obtaining the sanction, the AO is required to issue and serve notice u/s 148 upon the assessee, within the time limit as prescribed u/s 149, to enable him to assume jurisdiction to reopen the assessment.
(vi) The assessee is required to file to return of income, in response to notice u/s 148 and may request for the copy of reasons.
(vii) The AO is bound, as per law, to provide a certified and verbatim copy of Reasons to the assessee.
(viii) The assessee may file its objections before the AO, to the Reasons recorded, if any.
(ix) In pursuance to judgment of Hon'ble Supreme Court in the case of GKN Driveshafts 259 ITR 19 (SC), the AO is obliged to dispose of these objections and intimate the same to the assessee, before proceeding further with the reassessment proceedings.
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(x) Thereafter, the AO is obliged under the law to issue and serve notice u/s 143(2) to enable him to make assessment of the return filed by the assessee in response to notice issued under section 148.
(xi) Framing of the re-assessment order by the AO u/s 147/143(3) after providing adequate opportunity of hearing to the assessee and considering replies and evidences of the assessee, and all other applicable provisions of the Act.
(b) Under these facts and circumstances, let us now examine settled position of law on this issue. It has been held in various judgments coming from various courts that availability of fresh tangible material in the possession of AO at the time of recording of impugned reasons is a sine qua none, before the AO can record reasons for reopening of the case. We begin with the judgment of Hon'ble Supreme Court in the case of CIT vs. Kelvinator India Ltd. 320 ITR 561 (SC), laying down that for reopening of the assessment, the AO should have in its possession 'tangible material'. The term 'tangible material' has been understood and explained by various courts subsequently. There has been unanimity of the courts on this issue that in absence of fresh material indicating escaped income, the AO cannot assume jurisdiction to reopen already concluded assessment. (c) In the present case, it has already been discussed that admitted facts are that there was no fresh material coming into the possession of the AO, at the time of recording of the 'Reasons'. These facts have not been rebutted by Ld DR also. The case law relied upon by Ld DR in the case of Dr. Amin's Pathology, supra is not applicable on the issue being decided here. The issue that in absence of any fresh material, whether AO can proceed to record Reasons, was not before Hon'ble High Court, therefore Hon'ble High court had decided the issue of Change of opinion in that case. In the case before us, as discussed above, we are not going into that issue. In our considered opinion, at this stage, we need not go into the other aspect i.e. whether there was change of opinion or not. This issue has been aptly clarified by Hon'ble High Court in the case of Madhukar Khosla, (supra), wherein it has been held by their lordships that external facts or material constitute the driver, or the key which enables the AO to legitimately reopen the completed assessment and in absence of this objective "trigger", the AO does not possess jurisdiction to reopen the assessment. Further, most importantly, it was held by the Hon'ble High Court that it is at the next stage when the question, whether the reopening of assessment amounts to "review" or "change of opinion" arises. In other words, if there are no "new tangible materials", then there would be no "reasons to believe", and consequently reopening would be an impermissible review. Under these circumstances there would not arise any need to go the next stage to examine the next question, i.e., whether there was "review" or "change of opinion". The condition with respect to availability of "new tangible material" is step anterior to the condition of no "change of opinion" or "review".
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Pr. CIT vs. Tupperware India Pvt. Ltd (Delhi High Court) (10/08/151) S. 147: Even a s. 143(1) assessment cannot be reopened in the absence of new/ tangible material. (i) Though only an assessment u/s 143(1) and not 143(3) was made, the reopening order of the AO only refers to the report of Statutory Auditor under Section 44AB of the Act which report was already enclosed with the return filed by the Assessee. Therefore, factually, there was no new material that the AO came across so as to have "reasons to believe that the income had escaped assessment". (ii) The department's contention that the judgement in CIT vs. Orient Craft Ltd. (2013) 354 ITR 536 (Del) is contrary to the Full Bench verdict in CIT-VI v. Usha International Ltd. (2012) 348 ITR 485 and the issue should be referred to a larger Bench is not acceptable because the central issue examined in the decision of the Full Bench in Usha International Ltd. was as to what constituted a "change of opinion". The Court, therefore, does not consider the decision in Orient Craft Ltd. as being contrary to the decision in Usha International Ltd. In other words, there is no occasion for the Court to refer to a larger bench the question of the correctness of the decision in Orient Craft Ltd. which decision squarely applies to the facts of the present case. (Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500 & Madhukar Khosla v. Assistant Commissioner of income Tax (2013) 354 1TR 356 referred).”
The ld. AR, Shri R.S. Singhvi assailed the decision of ld. CIT (A) by stating that
the ld. CIT (A) erred in not appreciating the contentions raised before him in respect to
the very legality of reopening of the original assessment which was carried out under
section 143 (3) of the Act. According to him, there is no dispute about the fact that in
the instant case re-opening is sought to be done by the AO after the expiry of four years
from the end of the relevant assessment year and since the original assessment was
framed u/s 143(3), then reasons for reopening can be recorded only if there was failure
on the part of the assessee in disclosure of material facts, as has been envisaged in first
proviso to section 147 of the Act, and in this case according to the ld. AR, there is no
whisper in the reasons recorded about what material fact was not fully and truly
disclosed and according to him, the material facts which were not disclosed by the
assessee during the original assessment proceedings must have been emanating from
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the reasons recorded. And, according to ld. AR, the AO before recording the reasons
must have in his possession fresh tangible material which should have been the basis on
which the completed original assessment u/s 143(3) is sought to be reopened which
should be clearly spelled out in the reasons recorded to reopen which is not discernible
from a reading of the reasons recorded which, according to the ld. AR, the AO has
miserably failed to do so vitiating the usurpation of jurisdiction by the AO; and the ld.
AR pointed out that the ld. CIT (A) erred in not appreciating the fact that during the
original assessment proceedings u/s 143(3), the said proceeding was also supervised
under section 144A by the Addl.CIT, thereafter the CIT has also reviewed the order of
the AO under section 264. Thus, according to the ld. AR, the original assessment has gone through the hands of the AO (DCIT), Addl. CIT and CIT. So, according to Shri
Singhvi, the question of not disclosing full and true facts does not exist as the entire
facts were already available in the files of the said authorities, therefore, the question of
reopening after four years is impermissible in the eyes of law. Ld. AR, Shri Singhvi
took our attention to the ground raised by the assessee before the ld. CIT (A) in respect
to non-issuance and receipt of 143 (2) notice which has been repelled by the ld. CIT
(A) by not even addressing or mentioning about the issuance/receipt of the notice but
has repelled the ground simply by stating that in 153A proceedings, 143 (2) notice is
not required as held by Hon’ble Delhi High Court in Ashok Chaddha vs. ITO reported
in 337 ITR 399 (Del.) which, according to the ld. AR, is legally untenable because in
this case reassessment is not done under section 153A, so the reason given by the
CIT(A) is invalid therefore, the reliance of the Ashok Chadda case (supra) of the
Hon’ble High Court of Delhi is wrong and incorrect, whereas the settled position of law
by the Hon’ble jurisdictional High Court and Hon’ble Apex Court in Hotel Blue Moon
321 ITR 362 (SC) is that in reopening proceedings under section 147 / 148, issuance of
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143 (2) notice is sine qua non and is not a curable defect. The ld. AR pointed out that
the issue whether 143(2) notice has been issued and served on the assessee was a
question of fact which should have been addressed by the ld. CIT (A) and should have
given finding on the said fact, which has not been done by the ld. CIT (A) and he has
kept silent on whether the AO has issued 143 (2) notice to the assessee or not, is an
illegal omission on the part of the CIT(A) while deciding a crucial ground raised by the
assessee itself vitiates the impugned order. Thereafter, the ld. AR took our attention to
the sanction granted by Commissioner and Additional CIT under section 151 of the
Act, wherein our attention was taken to the reasons recorded and the sanction granted
by the Addl.CIT wherein he has written. “I am satisfied” and Commissioner has written the very same words “Yes. I am satisfied”. He took our attention to the fact
that both the authorities have granted the sanction on the very same day i.e, on
28.03.2011. Mr. Singhvi pointed out that there has been no discussion whatsoever was
noted in the said records by both these authorities and wondered as to how two senior
officers can decide to re-open the original assessment completed u/s 143(3) after expiry
of four years from the relevant assessment year, when the original assessment has gone
through the hands of DCIT, Additional CIT u/s 144A and CIT u/s 264 of the Act,
without even caring to ask the AO what was the material fact not disclosed by the
assessee during the original assessment and the CIT and Addl. CIT did not enquire as to
what was the fresh tangible material on which the reasons recorded is based upon to
reopen the original assessment done u/s 143(3) of the Act. Since it is not emerging
from the reasons recorded by the AO, which is for sanction before them, clearly shows
that both the officers have mechanically put their signatures without application of
mind and the said sanction is no sanction in the eyes of law, so resultantly the section
147/148 notice itself is vitiated on this count also. Thus, according to the ld. AR, the
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aforesaid legal grounds raised before the ld. CIT (A) has not been dealt with in
accordance with law and well settled principles of law, thus vitiating the impugned
order. In the light of the aforesaid submission, the ld. AR prayed that the reopening of
the assessment is legally impermissible and, therefore, the AO lacks jurisdiction to
reassess the assessee. The ld AR, emphasized that there was no fresh tangible material before the AO, to justify reopening, which could have been the basis for Reason to believe, which is absent in this case, so the issuance of notice to reopen is hit as settled
by Apex court in a plethora of cases. So according to ld AR, the AO, without having in his hands fresh tangible material pointing out of escapement of income and by not spelling out in the reasons recorded the facts which were not fully and truly disclosed by the assessee, the assumption of jurisdiction is void ab-initio. And since the assessee
had disclosed fully and truly all facts which were audited as per law, the entire exercise to reopen can be called as a review of the original assessment completed u/s 143(3) of the Act, which is impermissible and would amount to change of opinion on the same
facts which were already on record. Therefore, he prayed that the assumption of
jurisdiction by the AO to reopen be held as null and void.
The ld. DR submitted the written submissions on behalf of the Revenue on the
legal issues as under :-
“WRITTEN SUBMISSIONS OF REVENUE ON LEGAL ISSUES The written submissions are made on the following contentions raised by the appellant: 1. Non issue/service of Notice u/s 143(2) 2. No basis for prima facie belief by AO that income had escaped assessment 3. Reopening u/s 147 amounts to " Change of Opinion" Each issue is discussed below:
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NON ISSUE/SERVICE OF NOTICE U/S 143(2): In this regard following point are put forward by revenue to support its case : A. Order sheet entry: > Perusal of records of A.Y. 2004-05 clearly shows that notice u/s 143(2) was issued vide order sheet entry dtd. 24.11. 2011 as there is an entry to that effect in the order sheet. Copy of note sheet was provided to the Hon'ble Members during the course of hearing and the original order sheet was also put up for their perusal. > The immediate order sheet noting thereafter, i.e. on 28.11.2011, also shows that the Director of the company, Mr.Anil Aggarwal and Sh.Siddhart Goel, GM, Taxation, appeared before the AO. The order sheet noting dated 28.11.2011 is also signed by both - the Director and the GM (Taxation). Also both these notings on order sheet are in seriatim and appear on the same page. Hence the fact that notice u/s 143(2) had been issued was written large before them. It was never refuted by them during the course of assessment proceedings thereby implying in the affirmative that notice was issued and served upon the assessee. Their appearance on 28.11.2006 is clearly indicative of their compliance to notice u/s 143(2). > The ld. Counsel of the assessee stated before the Hon'ble Bench that the appearance on 28.11.2011 was made to file objections to notice issued u/s 148, and in response to notice issued u/s 142(1) on 21.11.2011, and not in response to notice u/s 143(2). > The above contention is rebutted by CIT(DR) on the ground that reasons for reopening the case u/s 147 were communicated to the assessee on 03/06/2011 and the assessee cannot take the plea that it came to file objections on 28.11.2011 (after more than 5 months) and that too immediately on issue of notice us 143(2) on 24.11.2011. Secondly the notice u/s 142(1) issued on 21.11.2011 had fixed the date of compliance for 29.11.2011 and not 28.11.2011 (copy of notice as obtained from the assessment records is enclosed as Annexure- 1. B. Special Audit u/s 142(2A) � Special audit u/s 142(2A) was ordered in this case during the course of re-assessment proceedings under consideration. � The show-cause notice to this effect was issued by the AO, to the assessee on 23.12.2011 fixing the case for hearing on 26.12.2011. In the said notice on Page 4 (top para) it was specifically informed to the assessee that notice u/s 143(2) has been issued to it. The relevant para reads as under- "Subsequently notice u/s 143(2) was issued to the assessee immediately on centralization. Sh.Anif Agarwal, Director of the company along with
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Sh.Siddhart Goel, GM, Taxation appeared on 28.11.2011 and filed objections to the reopening proceedings initiated, vide the reply of even date. .................. Meanwhile the hearing continued on 09.12.2011, 12.12.2011, 16.12.2011, 20.12.2011, 23.12.2011 calling for various details and books of accounts were also examined. THE ASSESSEE MADE COMPLIANCE TO THE NOTICES ISSUED AND FILED VOLUMINOUS DETAILS." The above para was read out from the original records before the Hon'ble Members during the course of hearing on 27.10.2015. � The assessee filed a reply to the above said show cause notice on 26.12.2011 ( Annex ) objecting to the special audit proposed by revenue. In the said reply, the assessee never contested the fact of non issue or non receipt of notice u/s 143(2). It did not even contest the AO's contention that " the assessee made compliance to the notices issued and filed voluminous details." The "notices issued" include notice issued u/s 143(2) as issuance of this notice categorically finds mention in the same para. This clearly implies that the assessee had very well accepted the fact during assessment proceedings itself that notice u/s 143(2) was issued and was received by it, and that it had also made compliance to the same. � An order u/s 142(2A) of the I.T.Act for conducting Special Audit, was passed in this case by the AO on 29.12.2011, where again the same set of facts were brought to the notice of the assessee at 'page 4 para 6' of the said order. The same are being reproduced below- "6. Subsequently notice u/s 143(2) was issued to the assessee immediately on centralization. Sh.Anil Agarwal, Director of the company along with Sh.Siddhart Goel, GM, Taxation appeared on 28.11.2011 and filed objections to the reopening proceedings initiated vide the reply of even date. ............... Meanwhile the hearing continued on 09.12.2011, 12.12.2011, 16.12.2011, 20.12.2011, 23.12,2011 calling for various details and books of accounts were also examined. THE ASSESSEE MADE COMPLIANCE TO THE NOTICES ISSUED AND FILED VOLUMINOUS DETAILS." The above para was read out from the original records before the Hon'ble Members during the course of hearing on 27.10.2015. � Hence, again and again the assessee has been informed by the AO during the course of re-assessment/142(2A) proceedings itself, that notice u/s 143(2) has been issued to it and in its compliance the Director as well as the GM (Taxation) have appeared before the AO. But the assessee has not refuted or contested the non issue and non receipt of the said notice. The assessee has also not controverted the affirmative statement of the AO that "the assessee made to the notices issued and filed voluminous details. "HENCE
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THE ISSUE & SERVICE OF NOTICE U/S 143(2) STANDS ESTABLISHED IN THIS CASE. � The Assessee has accepted the order passed u/s 142(2A) for Special Audit dtd.29.12.2011, and has r: details from time to time before the special auditors. By accepting the special audit order and not challenging it, the assessee has also accepted the contents of the order that notice u/s 143(2) was issued to it and that it had made compliance to the notices issued, and filed voluminous details. The Special Audit is an integral part of re-assessment proceedings in this case, and by accepting the special audit order passed by AO, and participating in it by filing details before the special auditor, the assessee has accepted the procedural formalities that have led to the special audit which includes issue and service of notice u/s 143(2) which has categorically been mentioned in the show cause notice as well as special audit order passed by AO. � If the assessee has alleged that notice u/s 143(2) was not issued or served on it, then it should have challenged the special audit order in writ on the very ground that no notice u/s 143(2) has been served upon it after issuing notice u/s 147, and that the special audit cannot be undertaken in the absence of the same as the very proceedings under which special audit has been done will be vitiated in the absence of a valid notice u/s 143(2). But the assessee has not challenged the special audit order passed by the AO. On the contrary it has accepted this order and complied to the queries raised by special auditors from time to time. Another important point to be noted is that the assessee even furnished the report of Special Auditors to the AO and complied with subsequent queries raised by the AO based on special auditor's report. � By accepting the show cause notice u/s 142(2A) & order u/s 142(2A), wherein there is categorical mention of notice u/s 143(2) and its compliance, followed by participation of the assessee in special audit proceedings as well as in re-assessment proceedings regarding queries based on special audit report, the assessee has lost its right to appeal that no notice u/s 143(2) was issued and served upon it. The assessee's contention on this issue therefore leads to absolute contradiction and is not permissible under any law, much less derive any mileage out of it. � Special audit is a costly affair and the cost is borne by the revenue. In terms of resources, the department has to pay a heavy price for conducting it. The assessee has duly participated in the same and was specifically informed during the course of special audit proceedings that notice under 143(2) has been issued to it. It was further affirmed by the AO in the order passed u/s 142(2A) on
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29.11.2011. By now alleging that notice u/s 143(2) was not issued /served, the assessee is also vitiating the proceedings u/s 142(2A) which were never challenged by the assessee at any point of time on the ground of procedural infirmity. If the assessee has accepted the special audit order the assessee has very well accepted the notice u/s 143(2) as that clearly finds mention in the special audit order. Case laws relied upon : a. COMMISSIONER OF INCOME TAX vs. VISION INC., Hon'ble HIGH COURT OF DELHI, (2012) 73 DTR 0201 vide order dtd. May 25 2012, held that – The Tribunal fell into an error in accepting the contention of the assessee without examining the crucial and relevant fact such as the appearance of the assessee's authorized representative before the Assessing Officer on 15.01.2005 which is the date fixed for hearing in the notice issued on 30.12.2004. The Tribunal further erred in holding that the participation of the assessee in the assessment proceedings is of no consequence because the 'provisions of Section 292BB came into force only from 01.04.2008. The participation of the assessee in the proceedings for the assessment in the present case is an important fact to be taken note of, not because of Section 292BB but in the light of the fact that the notice dated 30.12,2004 mentioned 15.01.2005 as the date of hearing, on which date the authorized representative had appeared and filed his power of attorney before the Assessing Officer. A little, probing was enough to show that the apparent was not the real. It would be against the spirit of law relating to income tax assessment if one were to too readily be willing to hold that there was non service or invalid service of the notice under section 143(2) of the Act, merely on peripheral allegations or facts and not looking at the substance i.e. whether the notice in fact was served and even acted upon by way of appearance entered before the Assessing Officer. This has made the impugned order erroneous and perverse as relevant and material aspects have been ignored and not given credence. A provision intended for the benefit of the assessee and conceived in accordance with the rules of natural justice should not be permitted to become a tool to ward off the liability to pay the tax. We are not to be understood as saying that in no case can the service of notice under Section 143(2) of the Act can be held to be invalid. (Para 17) Whenever a case is set up by the assessee that there has been no valid or proper service of the notice issued under Section 143(2) of the Act, be it for the purpose of regular assessment under Section 143(3) of the Act or for the purpose of a block assessment under Chapter XIV-B or for the purpose of an assessment under Section 153A, such a plea has to examined thoroughly and in depth by taking a practical reasonable view of the matter, not inconsistent with the statutory provisions, keeping in mind the basic principle that the liability to pay tax which is founded on the charging provisions of the statue, is not to be nullified on specious or unjustified pleas taken by the assessee.
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(Para 19) b. NARINDER KUMAR & ORS. vs. COMMISSIONER OF INCOME TAX -VII, Hon'ble HIGH COURT OF DELHI (2014) 369 ITR 0049 (Delhi) vide order dtd. July 3 '2014, has held - "............There is distinction between precluding a person who has not raised the plea of non-receipt of notice during the assessment proceedings, from subsequently raising such plea, and a case where the assessee has not controverted a statement during the assessment proceedings that it had duly received the notice under Section 143(2) of the Act In the latter case, where an assessee does not controvert an affirmative statement that it had duly received the notice on a particular date, the assessee would be precluded from controverting the same at a later stage and it would not be erroneous to hold that, as a matter of fact, the assessee had duly received the notice of the proceedings. Thus in the present case, the conclusion of the CIT that the assessee had duly received the notice in question on 31.10,2001 cannot be faulted. (Para 12) In the above background it is clear that notice u/s 143(2) was issued and served upon the assessee and the assessee cannot take the plea at the appellate stage that no notice u/s 143(2) was issued and served on it.
Now coming to the remaining two contentions of the assessee: 2. No basis for prima facie belief by AO that income had escaped assessment, 3. Reopening u/s 147 amounts to " Change of Opinion" The submissions in respect of the above contentions are made keeping in mind the settled principals/position of law laid down by the Hon'ble Apex court and Hon'ble High Courts including Jurisdictional High Court, regarding reopening of assessments u/s 147 in cases where proceedings u/s 143(3) have been concluded prior to reopening. The trite law in this respect is summarized below: � The AO can reopen the assessment if he has reason to believe the Assessee's income has escaped assessment. However, his reasons to believe must not be based on surmises, conjectures or occasioned by change in opinion but must be based on some tangible and credible material on the basis of which a reasonable belief could be formed that income of an assessee has escaped assessment. � Reasons must have a live link with the formation of the belief. � The language of Section 147 requires the AO to have a reason to believe and not a reason to suspect.
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� The reasons recorded must be examined on standalone alone basis and nothing can he imported or added to it. � The Court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the ITO � An assessment, which has been concluded under section 143(3) of the Act cannot be reopened after the expiry of four years from the end of the relevant assessment year unless the condition as specified under the proviso to Section 147, is met; i.e. the income of an Assessee has escaped assessment on account of failure on the part of the Assessee to disclose fully and truly all material facts necessary for the assessment. As the above position of law is settled by way of various judicial pronouncements including that of Hon'ble Apex Court and Hon'ble jurisdictional high court, various judgments supporting the same are not being discussed/cited as that would unnecessarily make the submissions bulky. 2. BASIS FOR PRIMA FACIE BELIEF BY AO THAT INCOME HAD ESCAPED ASSESSMENT It is important to refer to the satisfaction recorded by the AO and the same is discussed hereunder:- A. SATISFACTION OF THE ASSESSING OFFICER A copy of reasons recorded by the AO u/s 147, has already been provided to the Hon'ble bench as part of Paper-book filed by the assessee (Page 40). Contentions of Revenue: • A perusal of the reasons recorded by the AO shows that the AO's opinion is based upon findings of search and is not borne out of suspicion or imagination. • Reasons recorded by AO The reasons recorded by AO on standalone basis are - � During the search & seizure operation it was noticed that the assessee company follows processing of Pan masala as per Annexure A . The said annexure A, is a flow chart where the entire manufacturing process has been segregated into stage A to stage H and is part of the Satisfaction Note. The said annexure was received by the AO from Investigation wing along with information that except at stage G & H, not a single stage/process is performed in Guwahati. The said annexure was also shown to the Hon'ble Members during the course of hearing on 15.10.2015
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from the original records and categorization of stages was explained. � On the basis of this Annexure, the AO then mentions that except at stage G & H, not a single stage/process which is very crucial in the preparation of Pan masala (Rajnigandha) is performed in Guwahati. � To substantiate his above finding, and on the basis of information received from Investigation wing, the AO analysed the said annexure and has discussed the various ingredients of Pan masala which include - Catechu (Katha), Beetle Nut (Supari), Cardamom {Elaichi Seed), Sugandhi and then the AO has discussed how each raw material named above is procured & processed by the head office in NOIDA, and has described it in as many words by stating that,
- " cardamom is procured and its seeds are extracted from the shell, - beetlenut (Supari) is procured at Noida, then chopped into smaller pieces & processed - other materials too ore procured at Noida" > Then the AO goes on to record, that at Guwahati, drying up of processed supari, received from Noida, takes place, which is then mixed with other ingredients received from Noida and thereafter it is packed and ready for sale. � In the above background, the AO further observed in his reasons that - - the assessee is contravening the provisions of Section 80IA(8) of the I.T.Act. - entire value addition to the product is being attributed to the Guwahati unit by the assessee. - that excessive claim of deduction is being made u/s 80IC. � Thereafter in the last para of satisfaction note the AO has given a categorical finding that “Thus the income chargeable to tax has escaped assessment for the A.Y.2004-05. I am further satisfied that the 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 the assessment with regard to the Assessment Year under consideration". The reasons recorded above are strictly on standalone basis and no information has been added or imported into it. They have been written in stages only to show how the AO formed the prima facie belief on the
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basis of tangible information available, that income has escaped assessment. � The AO has strictly relied on annexure "A" (cogent/tangible material) which it had received from the Investigation wing. The Investigation wing had conducted the search and had physically verified all the premises at Delhi/Noida and Guwahati during search to find out how raw material is being procured and how various processes in manufacturing of panamasala are being carried out by Delhi/Noida as well as at Guwahati units. It is only on the basis of intrusive means of Search that the various stages of manufacturing have been categorized from A to H (Annexure A) to demonstrate the considerable role of Noida/Delhi office in the manufacturing process of pan masala. This information was passed on to the AO by the investigation wing and has been sensibly analysed by the AO in forming a prima facie belief that assessee is making an excessive claim of deduction u/s 80IC and is also contravening provisions of section 801A98) by making interunit transfers. � In view of the above, it is submitted, that the reasons recorded are after due application of mind to the information received from Investigation wing which has been thoroughly analysed to form a prima facie opinion that income has escaped assessment. In the last para of the satisfaction note the AO has categorically noted that escapement has occurred due to non disclosure of truly and fully the material facts by the assessee that were necessary for assessment of A.Y.2004-05. � It is further submitted that the information received from Investigation wing is in terms of the procedure followed by assessee in conducting its business, hence prima facie it will apply to all the assessment years during which such business was being carried out. It is not the assessee's case that it was not following this procedure in the relevant assessment year. The information received categorically reflects on role of Delhi / Noida unit in the manufacturing process, whereas the assessee has been showing that entire manufacturing is being done in Guwahati unit and thereby contravening the provisions of 801A(8) as well as making an excessive claim of deduction u/s 80IC. All these facts are well incorporated in the reasons recorded by the AO wherein he records that " the assessee is contravening the provisions of section 80IA (8") and "that entire value addition to the product is being attributed to the Guwahati unit by the assessee". Hence on standalone basis the reasons recorded satisfy the test of prima facie belief of the AO. � Without prejudice to the above, the role of Delhi/Noida units is further supported by two of the very highly placed employees of the assessee who, during the course of search, in their statements
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on oath u/s 131 of the IT Act, in very categorical terms, confirmed that the manufacturing of pan masala involves procuring and processing of raw material at Delhi units and that Guwahati unit has limited role in manufacturing of Pan masala. These statements were also before the AO at the time of recording the reasons and were also brought to the knowledge of Hon'ble Members during the course of hearing and copies of the same were also furnished. In view of the above discussion the AO has satisfied the primary criteria of having a prima facie belief that income has escaped assessment in this assessment year and has also establish the live link between the belief and the tangible material available before him. . B. SATISFACTION OF COMMISSIONER OF INCOME TAX U/S 151 OF THE ACT : The assessee has alleged that the satisfaction of the Ld. Commissioner while giving approval u/s 151 is without application of mind. In this regard reference is being made to Hon'ble Supreme Court's judgement in the case of S. NARAYANAPPA & ORS. Vs COMMISSIONER OF INCOME TAX, wherein their Lorship's have held that " There is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the CIT to accord sanction to proceed under s. 34 must also he communicated to the assessee." The said order has endorsed the view of the Hon'ble Madras High court in the case of THE PRESIDENCY TALKIES LTD. VS. FIRST ADDL ITO. Both the case laws are reproduced below: S.NARAYANAPPA & ORS. vs. COMMISSIONER OF INCOME TAX SUPREME COURT OF INDIA, (1967) 63 ITR 0219, Sections 147, 147(a) "It was also contended for the appellant that the ITO should have communicated to him the reasons which led him to initiate the proceedings under s. 34 of the Act. It was stated that a request to this effect was made by the appellant to the ITO, but the ITO declined to disclose the reasons, in our opinion, the argument of the appellant on this point is misconceived. The proceedings for assessment or assessment under s. 34(l)(a) of the IT Act start with the issue of a notice and it is only after the service of notice that the assessee, whose income is sought to be assessed or reassessed, becomes a party to proceedings. The earlier stage of the proceeding for recording the reasons of the ITO and for obtaining the sanction of the CIT are administrative in character and are not quasi-judicial. The scheme (of s. 34 of the Act is that, if the conditions of the main section are satisfied, a notice has to be issued to the assessee containing all or any of the requirements which may be included in a notice under sub s. (2) of s. 22. But before issuing the notice, the proviso requires that the officer should record his reasons for initiating action under s. 34 and obtain the sanction of the CIT who must be satisfied that the action under s. 34 was justified. There is no
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requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the CIT to accord sanction to proceed under s. 34 must also be communicated to the assessee. In The Presidency Talkies Ltd. vs. First Addl. ITO (1954) 25 ITR 447 (Mad): TC51R.597 the Madras High Court has expressed a similar view and we consider that that view is correct. We accordingly reject the argument of the appellant on this aspect of the case."
THE PRESIDENCY TALKIES LTD, VS. FIRST ADDL. ITO HIGH COURT OF MADRAS, Jan 22, 1954, (1954) 25 ITR 0447, Sections 147,151(1), Art. 226 Head Note Reassessment—Notice—Communication of reasons inducing the CIT to accord sanction—Adequacy of reason—Period of reassessment—It is not necessary that reasons which induced CIT to grant sanction for reassessment should be communicated—Adequacy of such reasons is not a matter of consideration by the Court—it is not necessary to state in the notice itself at the initial stage the period for which reassessment is sought Held "............. There is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the CIT to accord sanction to proceed under s. 34 must also be communicated to the assessee. The requirement regarding the communication of the reasons to the CIT is, in our opinion, intended to safeguard the interests of the assessee against any hasty action on the part of the ITO under s. 34 or an action without any justification. It is not intended by the proviso that the reasons should be communicated to the assessee. The satisfaction mentioned is the satisfaction of the CIT and the adequacy of the reasons is not a matter for consideration of the Court, and it is not open to the assessee to agitate the question, that the reasons were inadequate to sanction the initiation of the proceedings under s. 34 by the CIT." In the case of the assessee, the Ld. Commissioner has duly accorded his approval by stating that "I am satisfied". He has not used words such as "Yes" or " I agree". An administrative Commissioner has considerable experience behind him and can efficiently analyse the satisfaction note put up by the AO along with tangible material place before him. Hence it cannot be said that he did not apply his mind before according approval. Moreover the adequacy of the reasons for arriving at the satisfaction by the Commissioner cannot be questioned by the Courts as held above the Hon'ble Madras High Court which was approved by the Hon'ble Apex Court.
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REOPENING U/S 147 AMOUNTS TO " CHANGE OF OPINION" this regard it is important to go through the assessment orders passed prior to reopening of case under consideration in order to consider whether there was any change of opinion or not. Relevant orders are discussed hereunder :- 1. ORDER u/s 143(3): Originally the case was assessed u/s 143(3) vide order dated 28.12.2006 given below: Important aspects are a. Form 10CCB: � The assessee was claiming deduction u/s 80IC in respect of Guwahati unit. � As part of statutory requirement, the assessee filed prescribed Form No. 10CCB in respect of all such units claiming deduction u/s 80IB/80IC. � Column 20 of Form 10CCB required the assessee to give transactions of the undertaking (claiming deduction) with a related concern of the assessee or another undertaking of the assessee. However, in response to Column 20, the assessee reported only the transactions with the related concern, and the transactions with other units/undertakings of the assessee were not reported ( read deliberately omitted). � The relevant reports in form 10CCB have been filed by the assessee in the paperbook from pages 91 to 165. These reports have been filed shed-wise for Guwahati unit from Page 91 to 125. Annexure to all these reports show that only transactions with related concern have been shown. � Form 10CCB constituted part of audited accounts of the assessee. Inference drawn : The assessee deliberately did not disclose the transactions of Delhi/Noida unit with Guwahati unit in Form 10CCB and therefore the assessee failed to fully and truly disclose the material facts before the AO. Hence an important piece of information which had a direct bearing in this case was suppressed in the Audited accounts which were part of the return of Income. b. Questionnaires issued by AO: � The AO issued the 1st questionnaire on 13.01.2006, calling for following details:
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" 1. ............... Wherefrom each of the unit/division procures the different raw materials being used by it and what is the role of Delhi office in making procurement of raw material..............." (refer to Paper book page 166): � In response to the same assessee filed a reply dtd.2nd February 2006 ( pg.170 to 180 of paperbook) stating as under- "As regards the procurement of various raw materials and other inputs being used in various finished products of the company, we submit that these are procured from various suppliers located across the country. This is also to confirm that our Delhi office has no role to play in procurement process. " (top para, page 171 of paper book) � Again vide order sheet entry dtd.16.11.2006 (Annex 2), at point 3 , the assessee was asked -"16.11.2006 1.......... 2.......... 3. Details and note on movement of raw material - whether it is sent direct to the unit from the supplier or routed through Head office. Adj. to 20.11.2006." � The assessee filed its reply vide letter dtd. November 20, 2006 ( pg.243 of paper book), stating as under - "{A} As regards the movement of Raw material and other Inputs are concerned, we wish to state and confirm you, that against the Purchase Orders raised for and by various Industrial Undertakings i.e. unit located in various part of the country of the assessee, the material is directly supplied to the unit by the Supplier and no such Inputs is being moved through the Corporate Office of the assessee company located in Noida (UP)" � It will not be out of place to mention that during the course of assessment proceedings the assessee had filed a reply dtd.02.02.2006 (Page 170 -187 of paper book) enclosing therewith a chart wherein, it had shown the entire manufacturing process of pan masala and chewing tobacco. It is pertinent to mention that vide the same letter the assessee also furnished a chart showing that Pan masala was being manufactured at its various units spread across India in Noida, Solan, Agartala & Guwahati. In this background, and assessee's categorical denial discussed above " that our Delhi office has no role to play in procurement process, "and that" the material is directly supplied to the unit by the Supplier and no such Inputs is being moved through the Corporate Office of the assessee company located in Noida (UP)" the AO, in good faith believed that each manufacturing unit is following the
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process by itself. By no stretch of imagination could the AO have known that some of the stages of processing/manufacturing for Guwahati unit are being carried out in Noida/Delhi. The Hon’ble High Court of Gujarat in the case of YOGENDRAKUMAR GUPTA vs. lNCOME TAX OFFICER, May 6, 2014 (2014) 366 ITR 0186 (Guj) has observed that "that at the time of scrutiny assessment, a specific query was raised with regard to unsecured loans and advances received from the said company namely, Basant Marketing Pvt. Ltd. based at Kolkata. These being the transactions through the cheques and drafts, there would arise no question of the Assessing Officer not accepting such version of the assessee and not treating them as genuine loans and advances." � It was only after search, when on physical verification of the premises the Investigation wing found out that the raw material for Guwahati unit is being procured by Delhi/Noida unit and is being partiallv processed and then sent to Guwahati. Hence the assessee deliberately suppressed the facts during the course of original assessment proceedings by resorting to lies which were unveiled in search and were also admitted by the assessee in the course of proceedings u/s 147 which are under consideration. � All the other replies filed by the assessee during the course of assessment proceedings also do not utter a word about the procurement and processing of raw material by the assessee from Delhi/Noida unit for sending to Guwahati unit. � The replies filed by the assessee during the course of original assessment are placed at pages 170 to 256 of paper book filed by the assessee and the Hon'ble Bench was taken through each and every reply during the course of hearing. � Since the above replies of the assessee were also found to be in conformity with form 10CCB which was part of audited accounts, hence the AO in all good faith, and in the absence of any contrary material on record, accepted the reply of the assessee to that extent in the original assessment proceedings and the case proceeded on other aspects of section 80IC. � The other aspects of section 80IC which were then considered in original assessment proceedings included "Claim of 80IC deduction on Interest Income, Capital gains, excise Refund & Miscellaneous income"( Assessment order page 2), amounting to Rs.66,26,94,688/-. Only on these limited aspects the matter was examined u/s 144A by Addl.CIT also, and vide letter dated 22.12.2006, he directed that the income shown under the above heads is not derived from business of the industrial undertaking and therefore, the deduction u/s 801C is not admissible on this income. Accordingly, the AO disallowed deduction u/s 80IC to the
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extent of Rs.66,26,94,688/-(please refer to page 6 of paper book filed by assessee). � Hence the issue of procurement and processing of raw material at Delhi/Noida units before sending them to Guwahati, was NEVER examined by the AO due to blatant suppression of facts by the assessee. Inference drawn : The replies of the assessee dtd. 06.03.2006 & 20.11.2006 amounted to BLATANT LIES AND SUPPRESSION OF FACTS by the assessee and therefore the assessee failed to fully and truly disclose the material facts before the AO. Hence an important piece of information which had a direct bearing in this case/issue was suppressed by the assessee during the course of original assessment proceedings. The Hon'ble Supreme court in the case of Phul Chand Bajrang Lal 203 ITR 456 , has held as under: "...one has to look to the purpose and intent of the provisions. One of the purposes of Section 147 appears to be to ensure that a party cannot get away by willfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice to turn around and say ‘you accepted my lie, now your hands are tied and you can do nothing'. It would, be travesty of justice to allow the assessee that latitude." The ratio of above case law is squarely applicable in the case of the assessee. 2. ORDER u/s 264: Order u/s 264 was passed by the Ld.CIT on 29.01.2007 (Paperbook page 11-22) Important aspects are discussed hereunder: � The assessee filed a petition u/s 264, before the Commissioner of Income Tax, on the limited issue of disallowances made w.r.t. section 80IC in the order u/s 143(3), and certain other issues not connected with deduction u/s 80IC in the same order. � The Id.CIT, vide order dated 29.01.2007, only examined the limited issues raised and set aside the original assessment order with directions to re-examine the same issues after giving reasonable opportunity to the assessee. Inference drawn : During proceedings u/s 264, the issue of procurement by Delhi/Noida office and processing of raw material before sending it to Guwahati was NEVER examined at ail by the Ld.CIT and deduction u/s 80IC remained confined to limited issue of certain incomes not to be included for the * of deduction u/s 80IC as contested in the application.
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ORDER u/s 143(3) r/w sec. 264 The above order was passed on 28.03.2007. Important aspects are discussed hereunder: � On receiving the order u/s 264, proceedings were again initiated u/s 143(3). � Replies were filed by the assessee on various dates, which are part of paperbook filed by the appellant (pages 257 to 279). The Hon’ble bench was taken through all these replies during the course of hearing and it was specifically pointed out that in none of these replies filed by the assessee was it disclosed that raw material is being procured/processed by Delhi/Noida office before sending it to Guwahati unit. � During the course of hearing on 27.10.2007, the Ld. counsel for the assessee filed a letter dated.13.03.2007, allegedly issued by the AO, wherein several pages were enclosed in the form of notes calling for parawise comments of the assessee. The relevant reply dtd.15.03.2007 to this letter is enclosed as Annex 3 as it is not part of the paperbook filed by the assessee.. A close perusal of the letter dtd.13.03.2007 (supra), issued by the AO, shows, that in the note attached to the said letter, the assessee was asked to explain the Tax Holiday deduction, justification for Payment of Minimum Alternate Tax, and Applicability of Tax Holiday on Excise concession. Along with this, the procurement and processing of raw material by Delhi/Noida units was also brought to the notice of the assessee vide this letter dtd. 13.03.2007. and the assessee was required to furnish its reply and details in response to the same. However, in response to the above letter, the assessee filed reply on 15.03.2007 but confined its reply to only Tax Holiday deduction (page 1-3 of the reply), Payment of Minimum Alternate Tax ( page 3-4 of the reply) and Applicability of Tax Holiday on Excise concession (page 4-5 of the reply). The assessee conspicuously chose to remain silent on all other aspects of the letter issued by the AO particularly with reference to procurement and processing done in Noida/Delhi units prior to sending raw material to Guwahati for mixing, and packing. The assessee also filed another letter on 15.03.2007 (placed at paperbook page 275) but that too is silent on the relevant issue raised by the AO vide letter dtd. 13.03.2007. It is pertinent to note that the assessment was shortly concluded on 28.03.2007 and various replies were filed by the assessee on 17.03.2007, 23.03.2007,26.03.2007 & 28.03.2007, but in none of these letters the assessee filed any details or reply in respect of the comments/details regarding procurement and processing of raw material by Delhi/Noida units as called for vide alleged letter of AO dtd.13.03.2007. Interestingly, none of these letters ( post 15.03.2007) are part of paperbook filed by the assessee.
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During the hearing before the Hon'ble bench the assessee contended that the entire issue of 80IC with respect to procuring and processing of raw material by Delhi/Noida units and its subsequent transfer to Guwahati unit has been examined in earlier assessment proceedings but it could not point out a single reply wherein such details were divulged before the AO in any of the assessments or 264 proceedings. Hence during assessment proceedings u/s 143(3), and assessment proceedings u/s 143(3) r/w sec.264, the assessee failed to disclose fully and truly all the material facts despite being categorically asked to do so, and in the course of assessment proceedings it resorted to lies in order to suppress the facts and misguide the AO, which would have otherwise helped AO to form an opinion on the issue of role played by the Delhi/Noida units in procuring and processing raw material before sending it to the Guwahati unit particularly with reference to section 80IA(8) and excessive deduction u/s 80IC. In the absence of any details filed by the assessee during the original assessment and assessment proceedings r/w sec. 264, assessments were made were made without forming any opinion on this issue. If there was no opinion then how can there be a change of opinion subsequently ? In proceedings before ld.CIT u/s 264, the relevant issue never came up for consideration as the application was filed on limited issues and only those issues were examined by the Id.CIT. Again, when there was no opinion then how can there be a change of opinion subsequently?? Hence the contention of the assessee that all material facts were disclosed during the original assessment proceedings, during proceedings u/s 264 and during proceedings u/s 143(3) r/w sec.264 do not hold ground in the in view of the submissions above. CONCLUSION OF SUBMISSIONS In view of the detailed submissions above, all the conditions required for initiating proceedings u/s 147 have been fulfilled in this case and have been aptly demonstrated above. The same are summed up in line with the settled position of law: � The AO has rightly reopened the assessment as he had reason to believe that the Assessee's income had escaped assessment. His reasons to believe are not based on surmises, conjectures or occasioned by change in opinion but are based on tangible and credible material received from the Investigation wing after a search was conducted in this case. The tangible material was 'Annexure A' prepared by the Investigation wing after physically verifying (as is done in searches) the various premises of the assessee and identifying each stage of procuring and processing of raw material with reference to the place where such activity was being carried out. This had a direct bearing on deduction u/s 80IA(8) and excessive deduction u/s 80IC which finds a special
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mention in the Satisfaction Note recorded by AO. Hence the condition of having tangible material obtained subsequent to earlier assessments, stands fulfilled in this case � After sensibly analysing the tangible material available with him, the AO has formed reasonable belief that income of an assessee has escaped assessment. This can be seen from the step by step discussion of satisfaction note made in earlier paras in detail on standalone basis. � The reasons recorded by the AO have a live link with the formation of the belief as the information received by the AO in annexure A clearly shows that procuring and processing of raw material by Delhi/Noida unit led to the belief that the assessee was attributing the entire value addition to the product to the Guwahati unit resulting in excessive claim of deduction u/s 80IC and contravention of provision of section 80IA(8). Reference is again made to step by step discussion of satisfaction note made in earlier paras in detail on standalone basis. � Based on above the AO had a reason to believe and not a reason to suspect. � The assessee neither contested nor established that there in fact existed no belief or that the belief was not a bonafide one or was based on vague, irrelevant and non-specific information. � The reasons recorded have been examined on standalone alone basis and nothing has been imported or added to it. The statements of key persons have been relied upon in addition to the reasons recorded on standalone basis and without prejudice to the examination of the satisfaction note on the standalone basis. � It is settled law that the Court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the ITO. It has been demonstrated that AO had prima facie reasons to believe and the sufficiency of the reasons cannot be questioned at this stage. � The condition, that an assessment, which has been concluded under section 143(3) of the Act can be reopened after the expiry of four years from the end of the relevant assessment year only when the income of an Assessee has escaped assessment on account of failure on the part of the Assessee to disclose fully and truly all material facts necessary for the assessment, has been amply satisfied after discussing each and every order passed u/s 143(3), order u/s 264 and order u/s 143(3) r/w sec.264, where the assessee has resorted to lies to suppress the true facts and has not submitted any details in respect of procurement and processing of raw material by Delhi/Noida unit despite repeated opportunities given
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for this purpose. "The proviso to s. 147 envisages action in the ordinary course within a period of four years from the end of the relevant assessment year. That limitation does not, however, apply to cases where income chargeable to tax has escaped assessment on account, inter alia, of the failure of the assessee to disclose fully and truly all material facts." (CONSOLIDATED PHOTO & FINVEST LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX, Jan 17, 2006, (2006) 281 ITR 0394 (Del) The Apex Court also, while analyzing what amounts to 'full' and 'true' facts in the case of Sri Krishna Private Limited v. Income Tax Officer & Ors., reported in 2 21 ITR 538 has held that - "The power conferred upon the Income tax Officer by sections 147 and 148 is thus not a n unbridled one. It is hedged in with several safeguards conceived in the interest of eliminating room for abuse of this power by the Assessing Officers. The idea was to save the assessee from harassment resulting from mechanical reopening of assessments but this protection avails only to those assesses who disclose all material facts truly and fully." In Kantamani Venkata Narayana & Sons vs. Addl. ITO (1967) 63 ITR 638 (SC), the apex Court held that - "It is the duty of the assessee to bring to the notice of the ITO particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the ITO, if he had been circumspect, could have found out the truth, the ITO may not on that account be precluded from exercising the power to assess income which had escaped assessment." To the same effect is the decision of the Supreme Court in Malegaon Electricity Co. (P) Ltd. vs. CIT (1970) 78 ITR 466 (SC) where the Court observed : "It is true that if the ITO had made some investigation, particularly if he had looked into the previous assessment records, he would have been able to find out what the written down value of the assets sold was and consequently he would have been able to find out the price in excess of their written down value realised by the assessee. It can be said that the ITO if he had been diligent could have got all the necessary information from his records. But that is not the same thing as saying that the assessee had placed before the ITO truly and fully all material facts necessary for the purpose of assessment. The law casts a duty on the assessee to "disclose fully and truly all material facts necessary for his assessment for that year". The Hon'ble Gujarat high court in the case of YOGENDRAKUMAR GUPTA vs. INCOME TAX OFFICER, May 6, 2014 (2014) 366 ITR 0186 (Guj) has held that –
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“What needs to be emphasized is that the obligation on the assessee to disclose the material or what are called, primary facts-a mere disclosure but a disclosure which is full and true. A false disclosure is not a true sure. The disclosure must not only be true but must be "fully and truly", A false assertion, or statement, of material fact, therefore, attracts the jurisdiction of the Income tax Officer under section 34/147." In the same order the Hon'ble court has further held that it not furnish a reasonable ground for the Income tax Officer to believe that on account of the failure - indeed not a mere failure but a positive design to mislead of the assessee to disclose all material facts, fully and truly, necessary for the assessment for that year, income had escaped assessment? We are of the firm opinion that it does. It is necessary to reiterate that we are now at the stage of the validity of the notice under section 148/147, The enquiry at this stage of the only to see whether there are reasonable grounds for the Income tax Officer to believe and not whether omission/failure and the escapement of income is established. It is necessary to keep this distinction in mind." In view of the discussions above it is prayed that the case may be decided after considering the submissions above.”
On the other hand, ld. CIT DR, Mrs. Nandita Kanchan vehemently opposed the
contentions of the ld. AR and submitted that a search and seizure took place in the
assessee’s premises at Noida, Guwahati and Agartala. From the search conducted on
21.01.2011 and in the course of search of the DS Group situated in the North Eastern
state, namely, Guwahati and Agartala, certain facts emerged that would suggest that
assessee claimed deduction under Chapter VIA was grossly inflated. According to the
ld. DR, finding of the search proceedings suggests that functions performed at
Guwahati are that of drying up of processed beetle nut (processed supari) received from
Head Office, Noida and all the raw materials, namely, catechu, beetle nut, cardamom
and sugahiare procured and processed at Noida. Cardamom is procured and its seeds
are extracted from the shell. Beetle nut (supari) is also procured at Noida and then
chopped into smaller pieces and processed. According to her, various other ingredients
are also received from head office at Noida and this mixture is then packed and
dispatched to destination ordered by head office. From where it transpired that the
42 ITA No.5611 & 5581/Del/2013
assessee had claimed excessive deduction under section 80IB/ 80IC of the Act by
attributing entire value addition of Guwahati unit if the eligible unit thereby
contravening the provisions of section 80IA (8) of the Act, by not transferring the
goods and services held for the purpose of the eligible units to any other business
carried on by the assessee and vice versa at the market value of such goods and in the
process showing more than normal profits in the eligible undertakings. The AO had
reopened the assessment the reasons were furnished to the assessee and objection raised
by the assessee had been repelled by the AO with a speaking order. Ld. DR submitted
that the ld. CIT (A) has taken note of the fact that the form10CCB filed along with the
return of income has not been properly filled and the goods and services transferred from non-eligible units to eligible units had not been disclosed in these respective
column of form no.10CCB in entirety. These declaration of manufacturing goods /
services had direct nexus of manufacturing process at various units of the assessee
company. According to her, the ld. CIT (A) has taken note of the fact that in column
20 of the audit report of 10CCB are not disclosing inter unit transfers to eligible units.
So, the ld. DR submitted that the assessee failed to disclose full facts before the AO
during the original assessment. So, the reopening of assessment was legal.
The ld. DR countered the arguments of the ld. AR in respect of non-issuance of
the 143(2) notice by bringing to our attention the fact that vide order sheet entry dated
24.11.2011 wherein the AO has written that the 143(2) notice has been issued and
thereafter, she took our attention to the entry on 28.11.2011 and pointed out that the
assessee along with the AR has attended the proceedings before the AO and filed the
objection to the reopening. Therefore, according to the ld. DR, the assessee might have
received the copy of the 143(2) notice and thereafter had appeared before the AO on
28.11.2011. At that stage, the ld. CIT DR sought time to go through the entire record to
43 ITA No.5611 & 5581/Del/2013
see whether a copy of 143(2) notice can be found in the records. So, the Bench vide
order dated 15.10.2015 directed the Department to submit the proof of issuance and
service of the notice duly served; and if possible to the claim of the department that the
notice have been issued may be supported with affidavit of the AO; and the matter was
adjourned to 26.10.2015 which was again adjourned to 27.10.2015 wherein the ld. CIT
DR fairly conceded before the Bench that she could not trace/find a copy of the 143(2)
notice in the records and did not file any affidavit to support the issuance, even service
of notice etc. However, she placed before us a copy of the order sheet dated
24.11.2011 and pointed out that the AO has recorded that he had issued 143(2) notice
and she took our attention to the next entry which is dated 28.11.2011 and contended that the Director of the company, Mr.Anil Aggarwal and Sh.Siddhart Goel, GM,
Taxation, appeared before the AO pursuant to the said notice under section 143(2) and
filed objection regarding reopening of the assessment. She pointed out that the records
suggest that the reasons for reopening was given to the assessee on 24.04.2011 and
wondered as to how the assessee has taken up such a long time i.e, more than seven
months to file the objections and, according to her, the Director and GM (Taxation) of
the assessee company has appeared pursuant to the 143(2) notice only. The ld. CIT DR
took our attention to the fact that special audit was ordered against the assessee and in
that, it was clearly mentioned that 143(2) notice has been issued and served on the
assessee. She also pointed out that the assessee had vehemently opposed the special
audit by filing letter dated 26.12.2011, however, there is no whisper of non-receipt of
143(2) notice in the said objections raised before the AO. So, according to the ld. CIT
DR, now after participating in the reassessment proceedings, the assessee cannot turn
back and say that it had not received the copy of the 143(2) notice.
44 ITA No.5611 & 5581/Del/2013
Thereafter, the ld. CIT DR took our attention to section 292BB and contended
that the said section has been introduced by Finance Act, 2008 w.e.f. 01.04.12008 and
all pending proceedings including the reopening and reassessment in this case was
admittedly after 01.04.2008, so section 292BB is fully applicable in the case in hand
and therefore, since the AO in the order sheet entry dated 24.11.2011 has clearly stated
that he has issued the said notice, the assessee after participating in the said proceedings
cannot raise it in appellate proceedings without raising the same before the completion
of the reassessment proceedings and for buttressing her said contention, she referred to
the decisions of Hon’ble Kerala High Court reported in 82 CCH 307 (Kerala) dated
13.06.2012 and Hon’ble Punjab & Haryana High Court dated 12.07.2011 reported in 16 DTR 395 (P&H) and 59 DTR 289 (P&H) order dated 03.05.2011. By referring to these
decisions, she contended that admittedly notice under section 148 was issued on
29.03.2011 and the reassessment order was passed on 22.06.2012, therefore, since
section 292BB was introduced by Finance Act, 2008 w.e.f. 01.04.2008 the provision
applies in full vigour and as held by the Hon’ble Kerala High Court and Hon’ble
Punjab & Haryana High Court, the assessee is estopped from raising this plea before
the appellate authorities without raising the same before the AO. In the light of the
aforesaid, the ld. CIT DR pleaded that the legal grounds raised by the assessee against
the reopening of the reassessment is not tenable and was rightly not accepted by the ld.
CIT (A). Therefore, she does not want us to interfere in the order passed by the ld. CIT
(A) regarding these grounds.
The ld. AR Shri Singhvi, in rejoinder, took our attention to the order sheet entry
dated 24.11.2011 and took our attention to the fact that there is no mention of the mode
of dispatch whether by speed post / registered post/ by notice server and non-
production of the dispatch register according to him clearly indicates the fact that the
45 ITA No.5611 & 5581/Del/2013
notice under section 143(2) has not been issued and that the admission before the
Bench by the ld. CIT DR that she could not find a copy of the same in the records and
also the ld. CIT (A)’s silence regarding this mixed question of fact and law, clearly
shows that the notice under section 143(2) has not been issued at all and therefore, the
question of serving the same on the assessee does not arise. The ld. AR also pointed
out that in spite of the direction by the Bench to the Department to file an affidavit of
the AO in respect to issuance of notice and proof of serving of notice, the same has not
been complied with by the AO for reasons best known to them. In the light of the said
facts, the ld.AR contented that an adverse inference may be drawn against the
Department on this issue. 20. Ld. AR also vehemently contended against the presumption theory brought by
the CIT DR in the course of argument in respect to issuance and serving of notice under
section 143 (2) by citing that the AR and assessee appeared before the AO on
28.11.2011 was pursuant to the receipt of notice under section 143 (2) cannot be
countenanced because it is clearly written in the order sheet entry that the said AR
appeared on 28.11.2011 for filing the objections against reopening. The ld. AR also
stated that the mentioning of issuance of notice under section 143(2) in the notice
before special audit cannot have any relevance because even the special audit could not
bring out any adverse materials against the assessee. According to him, merely by
stating that notice has been issued in a show cause notice that too for special audit
cannot determine the fact whether 143 (2) notice has been issued or copy of which
should have been found in the records of the department. In the absence of the same or
in the absence of the dispatch register mentioning about the mode of dispatch etc.
leaves no doubt in the mind of any prudent person that said notice has not been issued
at all. The ld. AR cited the case of ACIT vs. Hotel Blue Moon – (2010) 321 ITR 362
46 ITA No.5611 & 5581/Del/2013
(SC) and contended that now, the issue whether 143 (2) notice is mandatory or not is no
longer res integra. The Hon’ble jurisdictional High Court in CIT vs. Lunar Diamonds
Ltd. – (2006) 281 ITR 1 (Del.) has also reiterated that the notice u/s 143(2) is
mandatory in 147/148 proceedings and is not a curable defect, which was followed by
Hon’ble Delhi High Court in CIT Vs. Vardhman Estate P Limited - (2006) 287 ITR
368 (Del.).
Coming to the contention of the ld. DR about the applicability of section
292BB in the instant reassessment, the ld. AR pointed out that this issue is no longer res
integra because the Hon’ble jurisdictional High Court (Delhi) has upheld the decision
of Special Bench decision in Kuber Tobacco Product Pvt Ltd 117 ITD 273 wherein it was held that the said section 292BB is applicable only for the assessment year 2008-
09 onwards and since there is no dispute that the relevant assessment year before us is
2004-05, the revenue cannot take the aid of section 292BB to cover this defect which is
incurable as held by the Hon’ble Supreme Court in the case of Hotel Blue Moon
(supra). Therefore, since the Hon’ble jurisdictional High Court decision in this aspect
is very clear so the Tribunal is bound by it and cannot go beyond the same. He also
brought to our attention to paper book page 166 which is the questionnaire raised
during the original assessment dated 13.01.2006 wherein extensive questions regarding
activities undertaken by units at various parts of the country including that of the role of
Delhi Office was asked and also took our attention to pages 12 & 13 of the letter dated
13.03.2007 and also stated that no incriminating material was found during the search
and seizure. He took our attention to the fact that statement given by Shri Pritam Singh
during the search cannot be relied upon for the assessment year in question because the
said employee was not in the services of the assessee at that relevant year and he has
joined the services of the assessee only in 05.01.2009, therefore, the statement given by
47 ITA No.5611 & 5581/Del/2013
him cannot be a basis for what happened in assessment year 2004-05. Mr. Singhvi
pointed out that the products are excisable products, the excise duty is duly paid and it
is all supported by the excise records. He also took our attention to pages 372 to 379 of
the paper book (letter dated 06.12.2006) and took our attention to page 375 wherein
assessee wrote to the Addl. Commissioner who has asked questions vide letter dated
27.11.2006 under section 144A about point no.II wherein, the assessee had confirmed
to the Addl.CIT that finished unbranded goods were transferred from one unit/branch to
another unit/branch in the course of local movement as well as Inter State Transfers,
which has been reflected in the P&L account under the head ‘Inter-Unit Transfers’ and
explained that Gross Sales have been reduced by Inter-Unit Transfers and also stated that since the transaction falls in the nature of transfer for captive consumptions, hence
the transfers have been recorded in the books of account on cost to cost basis and no
notional profit is being generated at transferring branch and also brought to our
attention the fact that the claim under section 80IB and 80IC has been claimed by the
assessee for the first time in assessment ear 2000-01 and the facts are pari materia from
that assessment year onwards, therefore, all the materials were on record, so now the
reassessment canvassed by the AO can only be called as a change of opinion. No new
facts has emerged after the search, therefore, the reasons recorded by the AO without
even elaborating on what material he has laid his hands on afresh for the assessment
year under consideration has erroneously come to an opinion, that there is an
escapement of income and the assessee has not disclosed true and full facts during the
original assessment, which is per se wrong and not borne out of any evidence and so
AO lacked jurisdiction to reopen the assessment. So, therefore, the reassessment order
is null and void in the eyes of law. Not only that section 151 of the Act was
mechanically done without application of mind which has been frowned by the Hon’ble
48 ITA No.5611 & 5581/Del/2013
Apex Court and Hon’ble jurisdictional High Court, therefore, the entire proceedings are
void ab initio. According to him, the ld. CIT (A) has not appreciated the said facts and,
therefore, has erred in turning down these grounds. Therefore, he prayed that the
impugned order may be quashed.
We have heard both the parties and perused the records. Firstly, we have to
decide the short question whether or not, on the basis of the reasons recorded by AO,
reassessment proceedings can be lawfully initiated; secondly, we have to examine
whether sanction granted under section 151 by the Addl. Commissioner of Income-tax
and Commissioner of Income-tax is valid in the eyes of law; thirdly, whether non-
issuance of section 143(2) notice is fatal to the impugned reassessment; and fourthly, whether section 292 BB provision can come to the rescue of revenue in respect to non-
issuance of notice under section 143 (2) ; and fifthly can the whole exercise by the AO
be termed as a Review of the original assessment completed by the predecessor AO
under section 143(3) of the Act and can be termed as “change of opinion".
Before we advert to the facts in this case, let us look into the well settled
principles regarding reopening of assessment completed u/s 143 (3) of the Act.
It is well settled in law that reasons, as recorded for reopening the reassessment,
are to be examined on a standalone basis. Nothing can be added to the reasons so
recorded, nor anything can be deleted from the reasons so recorded. The Hon’ble
Bombay High Court, in the case of Hindustan Lever Ltd. vs. R.B. Wadkar [(2004) 268
ITR 332], has, inter alia, observed that "……….It is needless to mention that the
reasons are required to be read as they were recorded by the AO. No substitution or
deletion is permissible. No additions can be made to those reasons. No inference can be
allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose
and open his mind through the reasons recorded by him. He has to speak through the
49 ITA No.5611 & 5581/Del/2013
reasons." Their Lordships added that "The reasons recorded should be self-explanatory
and should not keep the assessee guessing for reasons. Reasons provide link between
conclusion and the evidence….". Therefore, the reasons are to be examined only on the
basis of the reasons as recorded.
The next important point is that even though reasons, as recorded, may not
necessarily prove escapement of income at the stage of recording the reasons, such
reasons must point out to an income escaping assessment and not merely need of an
inquiry which may result in detection of an income escaping assessment. Undoubtedly,
at the stage of recording the reasons for reopening the assessment, all that is necessary
is the formation of prima facie belief that an income has escaped the assessment and it is not necessary that the fact of income having escaped assessment is proved to the hilt.
What is, however, necessary is that there must be something which indicates, even if
not establishes, the escapement of income from assessment. It is only on this basis that
the Assessing Officer can form the belief that an income has escaped assessment.
Merely because some further investigations have not been carried out, which, if made,
could have led to detection to an income escaping assessment, cannot be reason enough
to hold the view that income has escaped assessment. It is also important to bear in
mind the subtle but important distinction between factors which indicate an income
escaping the assessments and the factors which indicate a legitimate suspicion about
income escaping the assessment. The former category consists of the facts which, if
established to be correct, will have a cause and effect relationship with the income
escaping the assessment. The latter category consists of the facts, which, if established
to be correct, could legitimately lead to further inquiries which may lead to detection of
an income which has escaped assessment. There has to be some kind of a cause and
effect relationship between reasons recorded and the income escaping assessment.
50 ITA No.5611 & 5581/Del/2013
While dealing with this aspect of the matter, it is useful to bear in mind the
observations made by Hon’ble Supreme Court in the case of ITO Vs Lakhmani Mewal
Das [(1976) 103 ITR 437] that, “……the reasons for the formation of the belief must
have rational connection with or relevant bearing on the formation of the belief.
Rational connection postulates that there must be a direct nexus or live link between the
material coming to the notice of the ITO and the formation of this belief that there has
been escapement of the income of the assessee from assessment in the particular year
because of his failure to disclose fully and truly all material facts. It is no doubt true
that the Court cannot go into sufficiency or adequacy of the material and substitute its
own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and
every material, howsoever vague and indefinite or distant, remote and farfetched, which
would warrant the formation of the belief relating to escapement of the income of the
assessee from assessment.”
In CIT vs. Kelvinator of India Ltd. reported in 320 ITR 561, the Full Bench of
Hon’ble jurisdictional High Court held as under :-
“It is a well settled principle of interpretation of statute that the entire statute should be read as a whole and the same has to be considered thereafter chapter by chapter and then section by section and ultimately word by word. It is not in dispute that the Assessing Officer does not have any jurisdiction to review his own order. His jurisdiction is confined only to rectification of mistakes as contained in section 154 of the Act. The power of rectification of mistake conferred upon the Income-tax Officer is circumscribed by the provisions of section 154 of the Act. The said power can be exercised when the mistake is apparent. Even a mistake cannot be rectified where it may be a mere possible view or where the issues are debatable. Even the Income-tax Appellate Tribunal has limited jurisdiction under section 254(2) of the Act. Thus when the Assessing Officer or Tribunal has considered the matter in detail and the view taken is a possible view the order cannot be changed by way of exercising the jurisdiction of rectification of mistake.
51 ITA No.5611 & 5581/Del/2013
It is a well settled principle of law that what cannot be done directly cannot be done indirectly. If the Income-tax Officer does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to initiating a proceeding of reassessment or by way of rectification of mistake. In a case of this nature the Revenue is not without remedy. Section 263 of the Act empowers the Commissioner to review an order which is prejudicial to the Revenue. In Bawa Abhai Singh"s case [2002] 253 ITR 83 (Delhi), a Division Bench of this court of which one of us (D. K. Jain J.) is a Member, clearly held (page 88) : "The crucial expression is "reason to believe". The expression predicates that the Assessing Officer must hold a belief . . . by the existence of reasons for holding such a belief. In other words, it contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons inducing the belief. Such a belief may not be based merely on reasons but it must be founded on information. As was observed in Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC), the expression "reason to believe" is stronger than the expression "is satisfied". The belief entertained by the Assessing Officer should not be irrational and arbitrary. To put it differently, it must be reasonable and must be based on reasons which are material. In S.Narayanappa v. CIT [1967] 63 ITR 219, it was noted by the apex court that the expression "reason to believe" in section 147 does not mean purely a subjective satisfaction on the part of the Assessing Officer, the belief must be held in good faith ; it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational nexus or a relevant bearing to the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To that limited extent, the action of the Assessing Officer in initiating proceedings under section 147 can be challenged in a court of law."
It was further held that, “We are therefore of the opinion that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate
reassessment proceeding upon his mere change of opinion”. It was further observed
as under :-
“We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section
52 ITA No.5611 & 5581/Del/2013
(3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”
It is necessary to examine whether there was any “reason to believe” to have
had such an exercise. The term “reason to believe” cannot be considered or evaluated
in a water tight compartment and scope and applicability may vary from case to case,
depending upon the facts and circumstances. The power under sections 147 / 148
comes into existence if he had reason to believe that income has escaped assessment.
Formation of reason to believe that income escaped assessment has to be that of a
prudent person. The reasons for such belief have to be recorded in writing on the basis
of material in the possession of AO. While the words “reason to believe” are wide in
their import, it cannot include a mere suspicion or ipse dixit of the AO. The belief of
the AO should lead him to form an honest and reasonable opinion based on reasonable
grounds. (ITO vs. Lakhmani Mewal Das – 103 ITR 437 at 448 (SC) and Navinchandra
Mohanlal Parik vs. vs. WTO – 124 ITR 68). The reasonability of the grounds which
led to the formation of belief warranting reopening is tested from the point of view
whether or not they are germane to the formation of belief that income escaped
assessment and after 4 years, an additional safeguard or condition that escapement of
income was due to fault of the assessee, in not fully and truly disclosing the material
facts at the time of original assessment. The Hon’ble Supreme Court endorsing the Full
Bench decision of the Hon’ble Delhi High Court in CIT vs. Kelvinator of India Ltd. –
53 ITA No.5611 & 5581/Del/2013
256 ITR 1 held in its order reported in 320 ITR 561, “…..that Assessing Officer has
power to reopen, provided there is “tangible material” to come to the conclusion that
there is escapement of income from assessment. Reasons must have link with the
formation of belief.” Therefore, if the fresh tangible material which the AO has in his
possession is relevant to have nexus to the formation of belief then, of course, the AO
would have the necessary jurisdiction to take action under the Act. What is required to
be examined is not the adequacy or sufficiency of the grounds but the existence of
belief. In our view, all that one has to examine is that whether there was some material
which, gave rise to prima facie view if that income has escaped assessment and the
belief was formed in good faith or was it mere pretence for initiating action u/s 147/148
of the Act.
Now let us look into the facts pertaining to the assessee company for AY 2004- 05 to examine the legal grounds raised by the assessee which we have stated in para 16
(supra).
I. For the AY 2004-05, the assessee filed return of income on 30.10.2004 along
with Audit Report u/s 44AB.
II. The AO had issued scrutiny note u/s 143(2) dated 15.07.2005, and notice u/s
142(1) and question regarding inter unit sales was raised by letter dated 13.01.2006,
wherein, the following question was raised :-
“Furnish detailed note on business activities carried out from each of the division/unit/office of the company mentioning complete mailing address of each one of the business premises. With reference to each of the unit/division furnish detailed note on items manufactured/traded by it alongwith details of manufacturing processes involved. Wherefrom each of the unit/division procures the different raw materials being used by it and what is the role played by Delhi office in making procurements of raw
54 ITA No.5611 & 5581/Del/2013
material. Where books of accounts of each of the manufacturing unit and division of the company are being maintained.”
III. In reply to the aforesaid question, the assessee company replied as below :-
“In reply, it is submitted that the company is engaged in the manufacturing and distribution of Pan Masala, Pan Masala containing Tobacco, Chewing Tobacco, Spices and Salt, Mouth Freshener etc. which are being manufactured in its Manufacturing units located at Noida, Guwahati, Barotiwala, Delhi and Agartala mainly.” The details of product manufactured by each unit Noida, in various sectors, Solan in
Himachal Pradesh, Agartala in Tripura, Guwahati in Assam, Raison, Kullu and Okhla
Industrial Estate is furnished as Annexure ‘A’. List of warehouses/distribution centre
located at Noida, Lucknow, Patparganj, Lasudia (Indore) (M.P.), Jaipur, Ahmedabad,
Raipur, Ranchi, Haldwani, Patna, Bhiwandi, Ghusri (Howrah), Bangalore, Coimbatore and Aluva (Kerala) is disclosed in page 183 of paper book.
As regards the procurement of various raw materials and other inputs being
used in various finished products of the company, we submit that these are procured
from various suppliers located across the country. This is also to confirm that our Delhi
office has no role to play in procurement process. " (top para, page 171 of paper book)
IV. Assessee's letter dated 02.02.2006 giving details of inter unit transfers and that
Delhi office has no role in procurement process and detailed explanation on section
80IC and about income from eligible and non-eligible units, excise duty paid in
Guwahati and Agartala units in peculiar circumstances and about royalty payment to
M/s Flosyn Fragrances (P) Ltd. Excise notifications together with annexure 'A' & 'B’.
Copy of letter dated 10.02.2006 submitting about excise duty refund in respect of
Guwahati Unit and its relevance for deduction u/s 80IC together with Annexure 'A’ &
‘B'.
55 ITA No.5611 & 5581/Del/2013
Copy of assessee's reply dated 22.02.2006 filed to Ld. AO explaining unit wise
sales, nature of unit wise expenses and profit of various units, unit wise wastage
together with all annexure of this letter
Assessee’s letter dated 09.03.2006 together with all its annexures showing unit
wise stock, party wise details of job work.
Letter dated 10.11.2006 giving detailed note on deduction u/s80IC
V. Vide order sheet entry dated 16.11.2006 at point no.3, the assessee was asked
details and note on movement of raw material - whether it is sent direct to the unit from
the supplier or routed through Head office. The assessee filed its reply vide letter dated
November 20, 2006 ( pg.243 of paper book), stating as under -
"(A) As regards the movement of Raw material and other Inputs are concerned, we wish to state and confirm you, that against the Purchase Orders raised for and by various Industrial Undertakings i.e. unit located in various part of the country of the assessee, the material is directly supplied to the unit by the Supplier and no such Inputs is being moved through the Corporate Office of the assessee company located in Noida (UP)"
VI. Thereafter, on 27.11.2006, the assessee company on queries raised by AO on
20.11.2006 replied to the specific query as to the inter-unit transfer of goods
specifically replied that while confirming inter-unit transfer of unbranded goods
replied that no notional profit is generated/accrued at transferor branch, which is
reproduced below (page 247 of paper book) :-
“We confirm in reply to your query that our finished unbranded goods are transferred from one Unit/branch to another unit/branch in the course of local movement as well as Inter State Transfer’s, which has been reflected on the face of the profit and loss account. Since the transaction aforesaid falls in the nature of transfer for Captive consumption, hence no notional profits is being generated /accrued at Transferor branch. The goods which
56 ITA No.5611 & 5581/Del/2013
may be subject to transfer in the aforesaid nature, includes Pan Masala and Flavored to bacco in unbranded form. As regard to the Mixing process and person responsible are concerned for the same process, we wish to clarify that normally the Mixing Process of all Inputs viz perfumery compounds, Raw Material to formulate the final outcome is being carried out by the salaried employees of the company. MD is not directly involved in mixing of the Inputs to bring the final outcome sold by us viz. Pan Masala, Gutkha, and Tobacco etc. VII. On 27.11.2006. the Additional Commissioner in exercise of her power of her
power of supervising u/s 144A of the Act, the action of AO and to guide him for proper
assessment and issued notice to the assessee, inviting any objection, if any, in her
proposed supervision of the assessment and asked this question :-
“From P & L A/c it was observed that out of the gross sales were reduced by inter-unit sales of Rs. 80.27 Crores. Clarify what is the profit disclosed and treatment given to these sales in the books of accounts.”
VIII. On 28.12.2006, the AO passed the assessment order u/s 143(3).
IX. Thereafter, the Commissioner u/s 264 passed order on 29.01.2007 as
reproduced below :-
“Taking into account the totality of facts and circumstance of the case, it is considered fair and reasonable to set-aside the impugned assessment and restore the matter back to the file of Assessing officer for fresh enquiry, examination and adjudication. The assessing Officer is directed to make the fresh assessment as per law keeping in view the observations made in the preceding paragraphs and after giving reasonable opportunity to the assessee company of being heard. In the fresh assessment order, the Assessing Officer shall record his categorical findings on each and every issue which should be based on the material and evidence brought on records. In order to ensure justice and fair play to both the sides, revenue as well as the assessee company”
X. Thereafter, the assessee filed revision application u/s 264 before the CIT and the
AO vide letter dated 13.03.2007 has elaborately narrated the modus operandi of the
assessee company as given below :-
57 ITA No.5611 & 5581/Del/2013
"MODUS OPERAND! FOR PANMASALA & GUTKA • Set up packaging units at Bumani Maidan Gwvahati • Labour engaged for packaging - 300 (Largely contract workers) • Investment in Plant & Machinery in all the units which are around 8 at Bumani Maidan, Guwahati -10 crores • Process adopted at Guwahati. * Cul Supari is brought from Noida which contributes 80% of raw material (Labour engaged-200) * Grinding of Catechu is also done at Noida and then brought to Guwahati (Labour engaged - 50) * Grinding of Lime is also done at Noida and then brought to Guwahati (Labour engaged - 50) * (All these processing and storage units of Supari Catechu & Lime are at Sector 3, 4 &58, Noida and job workers are also DS Group associate firms and companies) * Perfumery compound is from DS Limited, Perfumery unit at Okhla Industrial Estate, Phase-Ill, New Delhi (Labour engaged- 100) * All these ingredients after cutting/grinding/blending are brought to Guwahati by truck/goods train. * Cut Supari is dried in ovens. * All these ingredients are mixed in 'Rori' Mixers. * Raw tobacco and Kiwam which are also sent from Noida to Guwahati are added in these ingredients, while making Gutka. * Pan Masala/Gutka is then packed in lamination pouches/boxes by FFS machines. * PAN Masala/Gutka is then cleared and excise benefit of 300 crores annually availed. " MODUS OPERANDI FOR CHEWING TOBACCO PACKAGING UNITS OF PS GROUP SET UP AT ARUNDHUTI NAGAR, AGARTALA. TRIPURA IN THE NAMES OF PS LIMITED, DHARMAPAL PREM CHAND LIMITED & SATYAPAL SHIVKUMAR • Set up packaging units at Arundhuti Nagar, Agartala. • Labour engaged for packaging - 200 (Largely contract workers)
58 ITA No.5611 & 5581/Del/2013
• Investment in Plant & Machinery in all the units which are around 3 at Agartala - 3 Crores. Process adopted at Agartala • * Raw Tobacco is brought from Noida -which contributes 90% raw material (Labour engaged-200 in all units together)
* Perfumery compound is brought from DS Limited, Perfumery unit at Okhla Industrial Estate, Phase-Ill, New Delhi (Labour engaged-100) * Silver leaves is brought from DS Limited Sector-2, Noida (Labour engaged -20) * All these ingredients are brought to Agartala by truck. * All these ingredients are mixed in "Rori 'Mixers
* Manufacture Tobacco is then packed in lamination pouches by FFS machines. * Manufactured Tobacco is then cleared and excise benefit of 200 crores annually availed." 8. From the above, it becomes self-evident that the assessing officer has analyzed and examined the issue of inter unit transfer and manufacturing at Guwahati unit and Agartala Unit in the light of provisions of section 80IC
XI. On 28.03.2007, the AO passed the de-novo assessment as per the direction of
the Commissioner.
XII. Thereafter, the original assessment of the relevant assessment year 2004-05 was
before the CIT(A) who disposed off the appeal on 17.04.2009.
XIII. Thereafter, we take note that on 21.01.2011, a search was carried out at the D.S.
Group of companies u/s 132 of the Act and vide impugned notice dated 29.03.2011 u/s
147/148 to reopen the assessment for AY 2004-05 was issued.
XIV. The sanction u/s 151 to reopen the original assessment u/s 143(3) after 4 years
was granted by the Commissioner and Addl.CIT on 28.03.2011 which is as under :-
59 ITA No.5611 & 5581/Del/2013 "Form for recording the reasons for initiating proceedings u/s 148 and for obtaining the approval of the Commissioner of Income Tax / Central Board of Direct Taxes. 1. Name and address of the assessee M/s Dharmpal Satyapal Ltd. 1711, S P Mukherjee Marg New Delhi. 2. Permanent Account No. AAACD0132H 3. Status Company 4. District / Circle / Range Circle – 10 (1), New Delhi. 5. Asstt year in respect of which it is Proposed to issued notice u/s 148 2004-05 6. The quantum of income which has Escaped assessment Rs.85,59,98,358/- 7. Whether the provisions of Section Section 147(c) of IT Act 147 (a), 147(b) or 147(c) applicable or all the provision to the section are applicable 8. Whether the assessment is proposed No To be made for the first time. If the Reply is in the affirmative please state: 9. If the answer to item No.8 is the Negative, please state ----
(a) The income originally assessed Rs.3,57,82,200/ u/s 143(3) dt 28.03.2007
(b) Whether is a case of under Under Assessment due to Assessment at too low a rate assess- excessive relief of section ment which has been made the 80IC of the Act. subject of excessive relief or allowing of excessive loss or depreciation 10. Whether the provisions of Sec. No 150(1) are applicable. If the reply is in affirmative, the relevant facts may be stated against item No.11 and it may also be brought out that the provisions of Sec.150(2) would not stand in the way of initiating proceedings u/s 147. 11. Reasons for the belief that income As per Annexure Á’ Dated : Name : (J.K. Chandnani) ENCL.: ANNEX.A Designation : ACIT, Circle 10 (1) New Delhi 12. Whether the Addl. Commissioner I am satisfied. is satisfied on the reasons recorded
60 ITA No.5611 & 5581/Del/2013 by the Addl.CIT that it is a fit case for the issue of notice u/s 148. SD/- 28.03.2011 (Dr. Mamta Kochar) Addl. Commissioner of Income-tax Range-10, New Delhi 13. Whether the Commissioner/ Chief Yes, I am satisfied. Commissioner is satisfied on the reasons recorded by the Addl. CIT that it is a fit case for the issue of notice u/s 148. SD/- 28.03.2011 (A.K. TEWARY) Commissioner of Income Tax-IV New Delhi
“ Annexure ‘A’ The assessee filed its return of income on 30.10.2004 after at a NIL income under normal provisions of the Act and at a sum of Rs.67,08,71,105/- u/s. 115JB of the Act. After completion of assessment proceedings, the assessee company was assessed at Rs.3,57,82,200/- under normal provisions of the Act and Rs.67,08,71,105/- u7s. 115JB of the Act. During the course of search & seizure operation conduced at the group companies of the assessee on dtd. 21/01/2011 it was noticed that the assessee company follows processing of Pan Masala as per Annexure 'A'. In the flow chart, the entire process has been segregated into stage A to stage H. not a single stage 7 process which is very crucial in the preparation of pan masala (Rajnigandha), is performed at Guwahati. Key ingredients of the Rajnigandha Pan Masala are as follows:- i) Catechu (Katha) ii) Beetle nut (Supari) iii) Cardamom Seed (Elaichi Seed) iv) Sugandhi.
During the course of search, it was noticed that functions performed at Guwahati are that of drying up of processed Beetle Nut (processed supari) received from Head Office, Noida and packing. All the raw materials, namely, catechu, beetle nut, cardamom and sugandhi are procured at head office situated in Noida. Catchcu (katha) is procured and processed at Noida, cardamom is procured and its seeds are extracted from the shell, beetle nut (supari) is procured at Noida, then chopped into smaller pieces & processed and other materials too are procured at Noida. At Guwahati, processed supari is dried in the ovens, and mixed with various ingredients received from Head Officer at Noida. This mixture is then packed and dispatched to destination ordered by the Head Office. It appears that assessee is attributing the entire value addition to the Guwahati to claim higher amount of deduction u/s. 80IC. By doing so the assessee is contravening the provisions of sub-section (8) of section 80IA of
61 ITA No.5611 & 5581/Del/2013
the IT Act, 1961 which are relevant for the purpose of computation of deduction u/s. 80IC of the Act. As such the findings of the search proceedings suggests that excess quantum of deduction u7s. 80IC have been claimed by the assessee in his return of income. Thus the income chargeable to tax has escaped assessment for the A.Y, 2004-05, I am also satisfied that the income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment with regard to the assessment year under consideration. Asstt. CIT, Circle 10(1) New Delhi.”
Referring to the aforesaid reasons recorded by AO, before us, the ld. AR, Mr.
Singhvi pointed out that the CIT (A) has not properly appreciated the arguments before
him that the AO was not having in his possession any “tangible evidences” while
issuing notices u/s 148 and took our attention to page 27 of the CIT (A)’s order wherein the said argument of the ld. AR has been considered by him and dealt casually by
stating some practice followed by the DDIT (Inv.) after search without dealing with the
merits of the contention raised by the AR, which according to Mr. Singhvi per-se
makes the order of the CIT (A) erroneous and perverse. In order to buttress that there
was no evidence i.e. no tangible material before the AO to initiate reopening as
required for reopening as held by the Hon’ble Supreme Court in CIT vs. Kelvinator of
India Ltd. (supra), Mr. Singhvi took our attention to the letter written by the AO on
01.12.2011 to DDIT (Inv.) to furnish any material relevant to AY 2004-05 as suggested
by letter dated 24.03.2011 of DDIT (Inv.) on the basis of which the case was reopened.
The ld. CIT (A) has reproduced the letter of AO dated 01.12.2011 to DDIT (Inv.) as
under :-
“In the above referred letter, it has been mentioned that various facts emerging from search proceedings suggested that the claim of deduction under chapter VIA of the act made by the assessee company was grossly incorrect. On the strength of evidences collected during the course of
62 ITA No.5611 & 5581/Del/2013
search and seizure proceedings, initiating action u/s 148 of the Act for the assessment year 2004-05 was also recommended. After satisfying himself, that the income for the relevant assessment year has escaped assessment, the DCIT Circle 10(1) New Delhi has duly initiated reassessment proceedings for the said assessment year. Pursuant to the notice under section 148 of the act, reassessment of total income the assessee company is to be made before 31.12.2011. In the circumstances, it is requested that copies of all the materials collected during the course of search which is relevant for the assessment year 2004-05, or has a bearing on the pending reassessment proceedings or would be useful in the exercise of powers by the Assessing Officer under section 80IA(8) of the Act, may kindly be provided to this officer urgently.”
Ld. CIT (A), after perusing the letter, held as under :-
“A perusal of the above it reveals that the Assessing Officer was satisfied on the basis of information provided vide letter of DDIT dt. 24.3.2011 for escapement of income. Vide this letter the Assessing Officer has called for copy of all evidences gathered during search. I have perused letter of ADIT (Inv.) dt. 24.3.2011. In that letter, ADIT (Inv.) has informed the Assessing Officer the finding of search for deduction u/s 80IC and requested Assessing Officer to see the relevant documents to satisfy himself. No document was sent alongwith the letter. It is usual practice that ADIT/DDIT (Inv.) conducing searches gather evidences and sends complete evidences on the conclusion of search and finalization of appraisal report. In view of the above, it cannot be concluded that the Assessing Officer was not having sufficient information at the time of initialing action u/s 147 for forming reason for escapement of income. The Assessing Officer can satisfy himself after perusal of documents. Documents need not be his custody.”
A reading of CIT (A) findings and AO’s letter dated 01.12.2011 to DIT (Inv.) a month before limitation to complete re-assessment i.e. 31.12.2011, which the AO himself states, we discern the following facts :- 31. Facts emerging from a perusal of the AO letter to DIT (Inv.) :- (i) ADIT (Inv) had forwarded a letter dated 24.03.2011 to the AO about facts of search conducted on 21st January 2011 and about the claim of deduction u/s 80 IC was grossly incorrect.
63 ITA No.5611 & 5581/Del/2013 (ii) ADIT (Inv) recommended initiation of action u/s 148 of the Act for the AY 2004-05. (iii) The AO asks for copies of all materials collected during the search, which is relevant for AY 2004-05 or has a bearing on the pending re-assessment proceeding or would be useful in the exercise of power by the AO u/s 80IA (8) of the Act. Facts emerging from the finding of CIT(A), after he had perused the letter of ADIT(inv) dated 24.03.2011, which according to DR, was the basis of re-opening. But here we would like to point out that in the reasons recorded, there is no whisper about such a letter from ADIT (Inv) and we are aware that the reasons recorded to re-open has to be seen on a standalone basis, however, we would like to examine whether there was any tangible material which was provided by the ADIT (Inv) to AO, which was the trigger to reopen on 25.03.2011, the very next day of receipt of the letter. (i) The CIT(A) has gone through the letter of ADIT (Inv) dated 24.03.2011. (ii) In the said letter, the ADIT (Inv) has informed the AO, the finding of search for deduction u/s 80IC. (iii) ADIT (Inv) further requested the AO to see the relevant documents to satisfy himself before reopening. (iv) CIT(A) after going through the ADIT (Inv) dated 24.03.2011 has given a finding that “No document was sent along with the letter.” (v) Then CIT (A) observes that it is a usual practice that ADIT/DDIT (Inv) conducting searches gather evidences and sends complete evidences on the conclusion and finalization of appraisal report.
64 ITA No.5611 & 5581/Del/2013 (vi) In the light of the above, CIT(A) was of the opinion that “it cannot be concluded that AO was not having sufficient information at the time of initiating action u/s 147 for forming reason for escapement of income.”
A conjoint reading of the aforesaid letters i.e. 24.03.2011 of ADIT (Inv) to AO which as per the DR was the basis of reopen and the letter dated 01.12.20011 of AO to DDIT (IV) and the CIT(A) conclusion we find that : (i) Vide letter dated 24.03.2011, the ADIT(Inv) has stated about the search conducted on assessee on 20.01.2011 and about deduction u/s 80IC. (ii) Further ADIT (Inv) asked the AO to go through the relevant documents and satisfy himself before re-opening u/s 148 of the Act. (iii) However, the CIT(A) fairly states that “No document was sent along with the letter”. (iv) ADIT (Inv) recommended AO to initiate reopening proceeding u/s 148. (v) Thereafter within a day’s time, i.e. on 25.03.2011, the AO is satisfied that there is a reason to believe that there is escapement of income. (vi) Vide letter dated 01.12.2011, the AO is frantically asking ADIT (Inv) to provide him materials relevant for AY 2004-05 unearthed during course of search or any material which is useful or having a bearing on section 80IA (8) of the Act for re-assessment. From an analysis of the aforesaid facts, it clearly emerges that ADIT (Inv.) vide letter dated 24.03.2011 stated about the search conducted at assessee’s premises on 21.01.2011 and about deduction u/s 80IC, which is pertaining to AY 2011-12. The ADIT (Inv.) requested the AO to go through the relevant material to satisfy himself before re-opening u/s 148 of the Act. What was the material the ADIT (Inv.) was referring to vide its letter dated 24.03.2011, obviously it is not any material which the
65 ITA No.5611 & 5581/Del/2013
ADIT (Inv.) has sent along with letter, because, CIT(A) has asserted that there was no
documents forwarded with the said letter. So, when we read the letter of AO dated
01.12.2011, we find that the AO is frantically asking the DDIT (Inv.) to provide
materials unearthed during AY 2004-05 or has any bearing on the pending re-
assessment proceeding or would be useful in the exercise of power by AO u/s 80IA (8)
of the Act; which clearly shows that AO even on 01.12.2011 was not having any
tangible material before him for AY 2004-05 suggesting escapement of income. So
without forwarding any fresh documents along with the letter dated 24.03.2011 ADIT
(Inv.) and by asking AO to satisfy himself after going through relevant material is
nothing but asking the AO to go through the old records of the original assessment. So we find force in the argument of ld. AR, Shri Singhvi that there was no “new tangible
material” with the AO from the hands of ADIT (Inv.) vide letter dated 24.03.2011,
which is necessary as held by the Hon’ble Supreme Court in CIT v. Kelvinator (supra)
in the hands of the AO, to come to the conclusion that there is escapement of income
from assessment.
In the light of the facts and circumstances discussed above, we can see that only
based on the “recommendation” of the ADIT (Inv.) dated 24.03.2011, the AO has
initiated report for sanction u/s 151 and issued notice, which is nothing but “borrowed
belief”. It has been held by the Hon’ble Supreme Court in Anirudhsinhji Karansinhji
Jadeja & Anr. vs. State of Gujarat – (1995) 5 SCC 302, that “if a statutory authority has
been vested with jurisdiction, he has to exercise it according to its own discretion. If
discretion is exercised under the direction or in compliance with some higher
authority’s instructions, then it will be a case of failure to exercise discretion all
together.” It has to be kept in mind that satisfaction recorded should be “independent”
and “not borrowed” or “dictated” satisfaction. Thus, we find there was no fresh
66 ITA No.5611 & 5581/Del/2013
tangible material for the AY 2004-05 with the AO and he has simply issued notice on
borrowed belief of ADIT (Inv.).
In the light of the above, we hold that there was no fresh tangible material
forwarded by the ADIT (Inv.) vide letter dated 24.03.2011 which was the foundation on
which the AO has made up his mind on 25.03.2011, to reopen the original assessment
completed u/s 143(3) of the Act which was supervised by Additional Commissioner u/s
144A and thereafter the Commissioner exercising his revisional power u/s 264 of the
Act. Also, we find force in the contention of the ld. AR that there was no evidence in
the hands of the AO while he took the sanction of Commissioner u/s 151(2) to reopen
the original assessment completed u/s 143(3) after 4 years. The process of manufacture
of the Pan Masala was already on record during the original assessment and simply by
saying that manufacturing process from stage ‘A’ to ‘H’ did not take place at the
eligible unit without a shred of evidence to support the said information cannot be
termed as a new tangible material and link to base a reason to believe escapement of
income. Therefore, the entire reopening is vitiated on this count.
The well settled law is that before reopening an assessment under section 147 of
the Act or, in other words, before usurping the jurisdiction to reopen, the AO has to
pass the ‘fresh tangible material filter’ in his ‘reasons to believe’ which can uncover the
undisclosed income pertaining to the assessment year of the assessee which AO
proposes to reopen, without passing through the said filter which should emerge from
the reasons recorded to reopen, will oust the jurisdiction of the AO and thus it is a
settled law that fresh tangible material as said before constitute the jurisdictional fact
which is sine-qua non to empower the AO to reopen the assessment. In the absence of
67 ITA No.5611 & 5581/Del/2013
the said jurisdictional fact renders the reopening ‘coram non judice’ and the
reassessment ‘null’ in the eyes of law.
Now let us examine the reasons recorded by the AO dated 25.03.2011 on a
standalone basis, we take note that all that the reasons recorded for reopening indicate
is that search conducted on 21.01.2011 at D.S. Group companies and the processing of
Pan Masala is given in Annexure ‘A’, which is flow-chart of manufacturing stage by
stage i.e. A to H and only G & H stages are happening at Gauhati unit. These stages we
find have been filed by the assessee vide reply dated 02.02.2006 (page 170 of paper
book) by filing detailed flow-chart (page 184 to 188 of paper book) before the AO
during the original assessment which cannot be termed as fresh tangible material for the assessment year under consideration. (We will deal with this Stage ‘A’ to ‘H’ in detail
later on in our order, when we deal with the proviso to section 147 i.e. true and full
disclosure by assessee during original assessment.) The reasons recorded for reopening
the assessment do not make out a case that the assessee had suppressed any material
factor or misguided the AO during original assessment completed u/s 143(3). As we do
not have the liberty to examine these reasons on the basis of any other material or fact,
other than the facts set out in the reasons so recorded, it is not open to us to deal with
any other material when we examine the reasons on a standalone basis to look in to the
question as to whether the income has escaped assessment. The Assessing Officer has
opined that income has escaped assessment of income because there is violation of
80IA (8) and assessee has claimed excess deduction u/s 80IC but then such an opinion
proceeds without going through the original assessment proceedings completed u/s
143(3)/144A and 264 of the Act and overlooks the fact that the assessee had replied to
the queries raised and all material facts necessary for the original assessment was on
record. Of course, it may be desirable, from the point of view of revenue authorities, to
68 ITA No.5611 & 5581/Del/2013
examine the matter in detail, but then reassessment proceedings cannot be resorted to
only to examine the facts of a case, no matter how desirable that be, unless there is a
reason to believe, rather than suspect, that an income has escaped assessment.
The ld. DR contended that the reasons recorded can be viewed strictly on
standalone basis and no information has been added or imported into it. According to
ld. DR, they have been written in stages only to show how the AO formed the prima
facie belief on the basis of tangible information available, that income has escaped
assessment. We are however not impressed by the said argument of the ld. DR because
the ld. AR brought to our notice that the flow chart which the AO is relying was part of
the original assessment & took our attention to pages 184 to 188 of PB, wherein the entire chart as shown by the ld. DR is found ‘ditto’ which was infact produced before
the AO during the original assessment and unit-wise balance sheet was filed by the
assessee and the assessee on 27.11.2006 has clearly replied about the transfer of
materials form unit/branch in course of local movement and inter-state transfers which
has been duly reflected in the profit & loss account. What the AO has done while
recording the reasons to reopen was to simply affix alphabets ‘A’ to ‘H’ over the
manufacturing process shown in the flow-chart by the assessee during the original
assessment and there is nothing new or the AO can claim to be ‘fresh’ information
before him. We find that the flow chart which AO harps upon to build his case is the
very same old flow chart produced by the assessee during the original assessment. This
in our humble opinion, cannot be termed as fresh tangible material. More over the Ld.
AR, took our attention to the letter of AO dated 13.03.2007 (reproduced supra) at the
time of assessment proceedings pursuant to order of Commissioner (CIT) Admn. u/s
264 of the Act. We find that as per this letter the AO has specifically spelled out the
69 ITA No.5611 & 5581/Del/2013
modus operandi adopted by the assessee along with in depth note on provision of
section 80IC which we have reproduced above.
Here we would like to point out that the ld. DR vehemently argued that the
statement recorded during the search under section 132 of Shri Pritam Singh Charak,
the territorial Head clearly brings out the fact that only Stage ‘G’ & ‘H’ out of Stages
‘A’ to ‘H’ are performed at Guwahati unit of the assessee group. This argument of the
ld. CIT DR cannot be accepted for two reasons, firstly that Shri Pritam Singh Charak
was appointed in assessee company as territorial Head in Guwahati w.e.f. 05.01.2009
and he was not employed with the assessee company in the FY 2003-04 i.e. relevant
assessment year before us. Therefore, his statement made if any can only be suggesting of certain facts from the year of his assuming the office as territorial Head from that
day onwards; and secondly, this fact is not emerging from the reasons recorded and we
have to look at the reasons recorded at a standalone basis without adding or omitting
anything from it, as held by Hon’ble Bombay High Court in Hindustan Lever Limited
(supra). The AO in his reason has not indicated any tangible material suggesting
escapement of income other than stating the functions of various units under the
assessee company by way of a flow chart which we find that the assessee had himself
has disclosed and submitted, so by again mentioning of a similar chart (except for
terming the stages to A to H) which was produced by the assessee during the original
assessment proceedings under section 143 (3) (pages 184 to 187 of paper book) which
we have already held that cannot be termed as fresh tangible material and the revenue
could not point out any new facts which had come into the notice of the AO for
reopening the original assessment that too completed u/s 143 which was under the
supervision of Addl. Commissioner u/s 144 of the Act and then later by the
Commissioner u/s 264 of the Act. So the original assessment can be reopened only if
70 ITA No.5611 & 5581/Del/2013
there is any new tangible material which comes in his hands which could have a
rational connection or nexus which could have a relevant bearing on the formation of
the belief, as laid down by the Hon’ble Supreme Court in the case of ITO Vs Lakhmani
Mewal Das [(1976) 103 ITR 437] that, “……the reasons for the formation of the belief
must have rational connection with or relevant bearing on the formation of the belief.
Rational connection postulates that there must be a direct nexus or live link between the
material coming to the notice of the ITO and the formation of this belief that there has
been escapement of the income of the assessee from assessment in the particular year
because of his failure to disclose fully and truly all material facts. It is no doubt true
that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for
reopening assessment. At the same time we have to bear in mind that it is not any and
every material, howsoever vague and indefinite or distant, remote and farfetched, which
would warrant the formation of the belief relating to escapement of the income of the
assessee from assessment.” As aforesaid, the stage ‘A’ to ‘H’ (Chart) and stated in the
reasons recorded find place in pages 184 to 187 of paper book which form part of the
original assessment proceedings before the AO and Commissioner. Further reliance
can be placed on the detailed judgment in the case of Madhukar Khosla vs. ACIT 367
ITR 165 (Delhi) wherein it has been held by the Hon’ble jurisdictional High Court that
the reopening is not permitted under the law unless it is based on fresh tangible material
and that if the “reasons to believe” are not based on new, “tangible materials”, the
reopening amounts to an impermissible review. It has been further observed that : “The
foundation of the AO’s jurisdiction and the raison d’etre of a reassessment notice are
the “reasons to believe”. Now this should have a relation or a link with an objective
fact, in the form of information or facts external to the materials on the record. Such
71 ITA No.5611 & 5581/Del/2013
external facts or material constitute the driver, or the key which enables the authority to
legitimately re-open the completed assessment. In absence of this objective “trigger”,
the AO does not possess jurisdiction to reopen the assessment. It is at the next stage
that the question, whether the re-opening of assessment amounts to “review” or
“change of opinion” arises. In other words, if there are no “reasons to believe” based on
new, “tangible materials”, then the reopening amounts to an impermissible review.
Here, in the instant case before us, there is nothing to show what triggered the issuance
of notice of reassessment – no information or new facts which led the AO to believe
that full disclosure had not been made (Kelvinator of India Ltd [(2010)320 ITR 561
(SC)] and Orient Craft Ltd [(2003)354 ITR 536 (Delhi)] followed, Usha International [(2012)348 ITR 485 (Del) (FB)] referred)”. In the present case, from a perusal of the
reasons given by the AO to reopen, it is clearly discernable that there was no new
material which has come to the hands of the AO in respect to the AY 2004-05 before
him. The AO in his reasons has not discussed any material for the assessment year
under consideration. Whatever has been stated is of certain facts which have been
discovered during search operation in January 2011 i.e. in AY 2011-12. From the
reasons recorded, we do not find a shred of new material which can be held material
which constitutes the driver or the key which enables the AO to legitimately reopen the
completed assessment and in absence of this objective “trigger”, the AO does not
possess jurisdiction to reopen the assessment, as held by Hon’ble jurisdictional High
Court in the case of Madhukar Khosla (supra). Further, most importantly, it was held
by the Hon’ble High Court that it is at the next stage when the question, whether the
reopening of assessment amounts to “review” or “change of opinion” arises. In other
words, if there are no “new tangible materials”, then there would be no “reasons to
believe”, and consequently reopening would be an impermissible review. It should be
72 ITA No.5611 & 5581/Del/2013
kept in mind that the condition with respect to availability of “new tangible material” is
a step anterior to the condition of no “change of opinion” or “review”.
However, we would like to examine other legal grounds for completeness. The
next important aspect which needs to be examined whether the proviso to section 147 is
applicable in this case before reopening the original assessment and to examine the
contention of the ld. AR that there was no allegation in the “reasons” about failure on
the part of the assessee in disclosure of material facts during the original assessment
proceedings. Admittedly, in this matter, the reopening is done after expiry of four
years and as per law, it can be done only if the AO is able to demonstrate that there was
failure on the part of the assessee in disclosing the material facts. In this regard, it would be appropriate to reproduce hereunder the First Proviso to section 147 of the Act
:-
“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:”
Though, in the last few lines of the reasons recorded, the AO has made an averment
that “Thus the income chargeable to tax has escaped assessment for the A.Y. 2004-05 I
am also satisfied that the income chargeable to tax has escaped assessment by reason
of the failure on the part of the assessee to disclose fully and truly all material facts
necessary for the assessment with regard to the Assessment Year under consideration.”
This bald statement cannot satisfy the requirement of law. The Hon’ble Bombay High
Court has held that in those cases, where the first proviso to section 147 is applicable,
the reopening cannot be done unless there is allegation in the reasons that there was
73 ITA No.5611 & 5581/Del/2013
failure on the part of the assessee in disclosure of material facts. Hon’ble Bombay
High Court in the case of Tata Business Support Services Ltd. v. DCIT 232 Taxman
Relevant para is reproduced here under:-
“In the present case, when the Revenue alleges failure to make full and true disclosure of material facts, then, the term failure has some specific legal connotation. Here, material facts are pertaining to the expenses under the head “management fees”. It is apparent that the words employed are material facts. It is not just facts but material facts. The word “material” in the context means “important, essential, relevant concerned with the matter, not the form of reasoning” (see Oxford Dictionary Concise Eighth Edition). Just as disclosure of every fact would not suffice but for proceeding under section 147 non disclosure ought to be of a material fact.”
The Hon’ble Supreme Court in the case of CIT v. Avadh Transformers (P.) Ltd. 51
Taxmann.com 369, wherein the Hon’ble Supreme Court has upheld the judgment of the Allahabad High Court, wherein it was held by the Hon’ble High Court that in absence
of failure on the part of the assessee in disclosure of material facts, the reassessment
proceedings could not be initiated after expiry of four years from the end of relevant
assessment year merely on the ground that in view of the retrospective amendment to
provisions of section 80IA, the assessee was not entitled to deduction granted earlier
under said section. Thus, even in such cases, when there was a retrospective
amendment in the law, the Hon’ble Supreme Court has approved the order of the
Hon’ble High Court, upholding the view that no reopening can be done after the expiry
of four years unless there was failure on the part of the assessee in disclosure of
material facts.
In a recent judgment of Hon’ble Delhi High Court in the case of Pr.CIT v.
Samcor Glass Ltd. (ITA No.768/2015 dated 12.10.2015), wherein Hon’ble High Court
frowned upon the Income Tax Department for reopening of the assessments of the tax
payers, in a casual manner and without complying with mandatory conditions of law.
Relevant portion of the judgment is reproduced below:-
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“4. Although the Assessees in both the appeals are different, the issue involved in both cases is similar, i.e., whether the reopening of the assessment under Section 147/148 of the Act is valid? 5. Apart from the fact that the impugned order of the ITAT suffers from no legal infirmity, the court is of the view that on the face of it, the reasons for reopening of the assessment in both the cases did not satisfy the basic requirement of the law, in at least in two aspects. One was that the reopening was of assessment beyond four years after the AY for which the original assessment was framed and yet the reasons for reopening did not categorically state that there was a failure by the Assessees to disclose any material particulars on the basis of which there were reasons to believe that the income has escaped assessment. This Court has recently, in a decision dated 22nd September 2015 in ITA No.356 of 2013 (CIT v. Multiplex Trading & Industrial Co. Ltd.), clearly stated in cases where reopening of assessment is beyond four years from the end of the relevant assessment year “the condition that there has been a failure on the part of the Assessee to truly and fully disclose all material facts must be concluded with certain level of certainty.” 6. Secondly, the Court finds that at least in respect of one of the issues, viz., payment of interest on fixed deposits, the Assessees drew the attention of the Assessing Officer (`AO’) to the fact that the amount has already been offered to tax and tax had been paid and yet, in the order disposing of the objections, the AO is completely silent as regards this objection. 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) Ltd 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.”
75 ITA No.5611 & 5581/Del/2013
The well settled law is that new tangible information which the AO got in his
possession must have an inevitable link with escapement of income which triggers the
AO to form a belief that there is an escapement of income, however, when this
information is regarding an assessment year which is four years before then an
additional requirement of law has to be also satisfied, i.e., even if there is an
escapement of income, still it has to be seen whether the assessee has furnished true and
full disclosure of the material facts before the AO during the original assessment. If the
assessee has made true and full disclosure of material facts regarding the new
information which is now in the hand of the AO, then the AO cannot reopen the
assessment. The Apex Court has time and again underscored the necessity of fresh tangible material pertaining to proposed reopening of assessment year, in the hands of
the AO which could form the basis on which he could draw the reason to belief
escapement of income, in the absence of such a fresh material in the hands of the AO,
the Hon’ble Apex Court has upheld the orders of the Tribunals and Hon’ble High Court
halting the misadventure of the AO in reopening the assessment.
Now let us examine this case as to whether the proviso to section 147 is
satisfied before the AO regarding reopening the assessment, i.e. as to whether the twin
condition that whether the assessee had disclosed truly and fully primary facts
necessary for completion of assessment during the original assessment.
From a reading of the said reasoning given by the AO, it can be seen that a
search conducted on 21.01.2011 i.e. in FY 2010-11 i.e., the AY 2011-12, is the fulcrum
on which the AO is basing his reasons to reopen, we do not find in the aforesaid reason
a whisper of any material which could be the basis on which it could suggest that the
assessee failed to disclose fully and truly all material facts necessary for the assessment
which in turn facilitated escapement of income.
76 ITA No.5611 & 5581/Del/2013
We take note that the CIT (A) as well as the AO were having a view that
manufacturing process and details of transfer of material which were filed during the
course of assessment proceedings u/s 143(3) of the Act did not disclose the flow of
goods and manufacturing process of various raw materials to finished goods unit-wise.
Further, it was stated that Column No.20 of Form No.10CCB required as per Rule
No.18BBB of Income Tax Rules, 1962 for claiming deduction u/s 10CCB was not fully
disclosed by the assessee in its return of income as well as proceedings prior to section
147 of the Act and, therefore, it was held by them that first Proviso to section 147 of
the Act, does not in any manner help the assessee.
However, after perusing the records submitted during original assessment
u/s143(3) by the assessee to the detailed queries of both AO and Additional
Commissioner u/s 144A of the Act, we find that the substance in the contention of the
assessee that true and full disclosure was made by it during original assessment u/s
143(3) we take note that during the course of assessment proceedings u/s 143(3) of the
Act, the claim of the assessee u/s 80IC was examined by the AO vide Para No.1 of the
assessment order. For the purpose of granting deduction, we find that the AO has
examined the audited balance sheet and profit & loss account of the company as well as
certificates issued by the Chartered Accountant in Form No.10CCB for all the eligible
units. Vide letter dated 13.01.2006, vide para no.1, with reference to each of the unit,
assessee submitted detailed note on items manufactured and traded by it along with
details of manufacturing process involved therein and the details of procurement of raw
materials along with role played by Delhi office in making procurement of raw materials. In response to this, assessee vide letter dated 02.02.2006, assessee submitted
the manufacturing process vide Annexure A & B to that letter. Further, it was
submitted that the Delhi office has no role to play in procurement process. Along with
77 ITA No.5611 & 5581/Del/2013
that books of account of each manufacturing unit maintained separately were also
submitted. The flow chart of the process is found placed at pages 184 to 188 of the PB
which were also submitted before the AO. Further, during the original assessment
proceedings, based on the quantitative details of each of the undertaking eligible for
deduction, vide letter dated 09.03.2006, unit-wise wastage and yield analysis was
submitted before the AO. Further, unit-wise closing stock and comparative analysis of
yield of betel nut in various units as compared to other units were also submitted.
While submitting these details, the opening stock of raw material as well as work-in-
progress and purchases made during the year resulting into the consumption of material
as well as closing stock of raw material or work-in-progress in quantity were submitted. Further, vide letter dated 20.11.2006, assessee submitted details in response to a
specific query that the movement of raw material and other inputs are concerned
against the purchase orders raised for and by various industrial undertakings located in
various parts of the country, and that the materials are directly supplied to the unit and
no such input is being moved through the corporate office of the assessee company
located at Noida, Uttar Pradesh. Further, vide letter dated 27.11.2006, the assessee
submitted that finished unbranded goods are transferred from one unit/branch to
another unit/branch in the course of local movement as well as inter-state transfers
which have been reflected on the face of the profit & loss account. Further, assessee
also stated that these transfers are for captive consumption, same are transferred at cost.
The assessee submitted that the goods which may be subject to transfer includes Pan
Masala and Flavoured Tobacco in unbranded form. Vide letter dated 09.03.2007, the
assessee further submitted that all these commodities are manufactured at its
manufacturing unit located at various sites and distributed through a business channel.
Further, vide letter dated 15.03.2007, the assessee submitted unit-wise expenditure of
78 ITA No.5611 & 5581/Del/2013
all these units before the AO. Further, we take note that vide letter dated 06.12.2006,
vide point no.2, the assessee had submitted that gross sales of the company has been
reduced by the inter-unit transfers and in the same letter, vide point no.4, the details of
the valuation of closing stock as well as work-in-progress was also explained along
with details of gross profit of the units. We also take note that vide point no.6, in the
said letter the comparative statement of percentage of yield, gross profit and net profit
as compared to preceding three years was also submitted. On an analysis of the above
facts, it is apparent that the AO had on record the aforesaid details which was sought by
him and obviously had applied his mind on each and every item which has gone into
the profit derived by the industrial undertaking and after that, the AO has granted as
deduction u/s 80IC of the Act.
On reading of the First Proviso to section 147, it is apparent that the notice u/s
148 can be issued when an assessment has been made u/s 143(3) after expiry of four
years from the end of the relevant assessment year, only if there is a failure on the part
of the assessee to “disclose fully and truly all material facts necessary for his
assessment for that assessment year”.
From the above stated submissions made during the course of assessment
proceedings, it is apparent that assessee has disclosed fully and truly all material facts
which were necessary for the assessment of income. Now, coming to the issue that the
assessee has failed to disclose flow of goods and manufacturing process of various raw
materials to finished goods as allegedly have not been disclosed. We have referred to
various pages of submission made u/s 143(3) by the assessee wherein a flow chart of
manufacturing process is disclosed. Furthermore, regarding flow of goods, assessee
has submitted a detailed chart according to which it has shown opening stock of raw
79 ITA No.5611 & 5581/Del/2013
material, purchases, closing stock of raw material and material consumed along with
the opening and closing stock of raw material and material consumed along with
opening and closing stock of work-in-progress. Assessee has also disclosed the
opening stock and closing stock of finished goods and its valuation methodology.
Based on this, quantitative details for each of the unit and yield of the material
produced are also explained. Coupled with the above quantitative information,
assessee has submitted comparative gross profit and net profit too, therefore, in our
considered opinion, assessee has disclosed fully and truly the flow of goods as well as
manufacturing process of raw materials to finished goods unit-wise.
The ld. DR vehemently argued that in Form No.10CCB filed with the AO for
claiming exemption, the assessee has not furnished inter unit transfer of eligible units in
Column No.20 of Form No.10CCB. At Sl. No.20 of the audit report, the assessee has
not mentioned anything about inter-unit transfer of the goods. Here also, we would like
to point out that this deficiency point out in Form 10CCB is not emerging from the
reasons recorded and we are aware that we should look into the reasons on a standalone
basis. However, for completeness, we would like to deal with it. We find that in Form
10CCB, the assessee has described certain transactions therein regarding functions
from corporate office, all expenditure, such as, director’s remuneration and
commission, be that be. On a perusal of the First Proviso to section 147 speaks about
the full and true disclosure of all material facts necessary for its assessment. During the
course of original assessment proceedings, assessee has submitted about the inter unit
transfer of the material as well as explained the role of its Delhi corporate office in
procurement of material. In various submissions, it has been ascertained that there is
inter-unit transfer of goods between one unit to other unit of the assessee in more than
one submission and further, assessee has also disclosed the pricing or the value at
80 ITA No.5611 & 5581/Del/2013
which such materials are transferred. Assessee further submitted that during the
original assessment, sale of goods accounted for are also net of inter-unit transfer.
From this, it is evident that the details of inter-unit transfer were furnished by the
assessee before AO at multiple times and answers to Additional CIT u/s 144 of the Act.
Now, we go to examine that in spite of submitting this information whether not
mentioning of these transactions in Sl.No.20 of the Form No.10CCB can it be said to be
a material fact for the purpose of assessment of income of the assessee. In our view,
the assessee has submitted voluminous details regarding inter unit transfer along with
its valuation and disclosures. Merely because column no.20 of the Form No.10CCB
was not filled properly, it cannot be said that material facts have not been fully and truly disclosed by the assessee. Form No.10CCB is an audit report which is required to
be certified by a Chartered Accountant who certifies that the conditions stipulated in
section 80IC and the amount of deduction claimed by the assessee meets the required
conditions as per law. Perhaps, the auditor has certified only the payment made to
persons specified u/s 40A (2)(b) of the Act and a perusal of the balance sheets of each
unit clearly spells out in no uncertain terms the inter unit transfer which were produced
before the AO during the original assessment. Admittedly, the information sought by
Form No.10CCB has been contained therein the balance sheet of each unit. The AO
himself has examined these aspects in a proper manner during the original assessment
proceedings and being satisfied has not taken any adverse view that too under the
watchful eyes of the additional Commissioner u/s 144A of the Act. Since such
information has already been gathered by AO/additional Commissioner during the
course of assessment proceedings in more exhaustive manner, and in the light of the
fact that audited balance sheets are part of Form No.10CCB there is no merit in the
81 ITA No.5611 & 5581/Del/2013
allegation that there was omission or failure on the part of the assessee in disclosing the
primary facts.
We wish to make it clear that the statutory threshold provides for an obligation
on the AO to spell out in clear terms which facts were not fully and truly disclosed at
the time of original assessment by the assessee. A bald assertion to the said effect does
not satisfy the said threshold as held in the case of Atma Ram Properties Pvt. Ltd. vs.
DCIT – 343 ITR 141(Del), wherein the Hon’ble Jurisdictional High Court held as
under: Page No.218
“ The reasons recorded above do state that the appellant assessee had failed to fully and truly disclose the facts but do not indicate why and how the assessee had failed to make full and true disclosure of the material facts. Mere repetition or quoting the language of the proviso is not sufficient. The basis of the averment/statement should be either stated or should be apparent/ lucid/explained from the record.”
Apart from the above, here is the case where reasons have been recorded on the
basis of inferences and not on facts pertaining to the instant year. Inferences are in the
domain of the AO and not in the realm of the assessee. This was so held by the
Constitution Bench of Hon’ble Supreme Court by majority order in the case of Calcutta
Discount Co. Ltd. vs. ITO reported in 41 ITR 191 (SC). The facts of the case was that
in the original assessments of the company (i.e. Calcutta Discount Ltd.) for the
assessment years 1942-43, 1943-44 and 1944-45, the profits realized by the company
by sales of shares were not assessed to tax. The Income-tax Officer proposed to initiate
reassessment proceedings against the company and in his reports to the Commissioner
for the purpose of obtaining his sanction, he stated that at the time of the original
assessments the presentations made on behalf of the company that the sales of shares
were casual transactions and in the nature of mere change of investments were
82 ITA No.5611 & 5581/Del/2013
accepted, however, the result of the company’s trading from year to year revealed that
it had really been systematically carrying on a trade in the sale of investments, and that
as such the company had failed to disclose the true intention of the sale of shares. On
March 28, the Income-tax Officer issued notices u/s 34 of the Act calling upon the
company to submit fresh returns. The company submitted the returns but applied to the
High Court under Article 226 of the Constitution of India for the issue of appropriate
writs or orders directing the officer not to proceed to assess on the basis of these
notices, on the ground, inter alia, that the Income-tax Officer did not have reason to
believe that under-assessment had occurred by reason of the omission or failure on the
part of the company to disclose fully and truly all material facts necessary for assessment. The Income-tax Officer filed an affidavit in court in which he stated that
in the course of assessment proceeding for the year 1944-45, it was represented on
behalf of the company that the sales of shares in that year were “casual transactions”
and were in the nature of “mere change in investments”; that in the assessment for the
years 1945-46 and 1946-47 profits earned by sale of shares were included in the total
assessable income of the company, it having been discovered that the company was in
fact carrying on the business of selling shares contrary to its earlier representations; and
that by its memorandum and articles of association, the company was authorized to
carry on business of diverse kinds, especially to hold and deal in shares and securities
and to carry on business as financiers; and asserted that he had reasons to believe that
by reason of the omission or failure of the company to disclose fully and truly all
material facts necessary for the assessment, income chargeable to income-tax had been
under-assessed and that he had recorded his reason in that behalf in the reports
submitted by him to the Commissioner.
83 ITA No.5611 & 5581/Del/2013
The Hon’ble Supreme Court Constitution Bench by a majority laid the law as to
what constitutes full and truthful disclosure and held in page 201 as under :-
“ Does the duty, however, extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else - far less the assessee - to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences - whether of facts or law - he would draw from the primary facts. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicate it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ? It may be pointed out that the Explanation to the sub section has nothing to do with "inferences" and deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the Income tax Officer could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose "inferences" to draw the proper inferences being the duty imposed on the Income tax Officer. We have, therefore, come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.”
In page 203, the Hon’ble Supreme Court while reversing and disagreeing with
the view of the Hon’ble Calcutta High Court reported in (1953) 23 ITR 471 held as
under :-
“ The learned Chief Justice seems to have proceeded on the basis that when from certain facts inferences are to be drawn there is a duty on the assessee to state what the correct inference should be and if he has made a wrong statement as regards the inference to be drawn that also is
84 ITA No.5611 & 5581/Del/2013
an "omission or failure to disclose a material fact." For the reasons given earlier we do not think that this is the correct position in law.”
In the said case, the Hon’ble Supreme Court to meet the point of the ITO that
during the original assessment, the assessee had made a statement that the profits of the
company arising out of dealings in shares were not taxable as the company was not a
dealer in shares and securities and the dealings in shares were casual transactions and
were in the nature of mere change in investments and thus, the profits resulting
therefrom were not taxable and, therefore, based on that statement, the original
assessments were made on the basis that assessee was not carrying on any business
dealings in shares. However, in the assessments for 1945-46 and 1946-47, the profits on
sale of shares were included in the total assessable income of the assessee it having been then discovered that the assessee was in fact carrying on business in shares
contrary to its representation that it was not. Therefore, the ITO had reasons to believe
that by reason of the omission or failure of the assessee to disclose fully and truly all
material facts necessary for the assessments, therefore, the reopening was justified. The Hon’ble Supreme Court has held as under :-
“It appears clear that the Income tax Officers who made the assessments for the years 1942-43, 1943-44 and 1944-45 proceeded on the basis that this was an investment company and considered the question whether in spite of its being an investment company certain sales of shares wherefrom the company made a profit were by way of trading in shares and not by way of changing the form of investment. Whether these sales by an investment company should in law be treated as trading transactions, and the profits made from the sales are trading profits liable to tax, was the matter which it was the Income tax Officer's task to decide. No duty lay on the company to admit that these transactions were by way of trade. The fact that on behalf of the company Mr. Smith of Lovelock & Lewes stated that the company was not a dealer in shares and securities does not, therefore, amount to an omission to disclose fully and truly any material fact.”
85 ITA No.5611 & 5581/Del/2013
Applying the abovesaid ratio laid by the Hon’ble Supreme Court Constitution Bench wherein the AO based on the subsequent year disclosure by the assessee on an issue tried to invoke the reopening of original assessment after 4 years drawing inference that assessee failed to truly and fully disclose material facts was set at naught by the Hon’ble Supreme Court. It needs to be seen that the assumption by the present AO in the instant case that process from ‘A to H’ were not carried out at the eligible undertaking in the instant year is merely an inference and not a fact supported by any material stated in the reason recorded. As inferences cannot be substituted for facts and also, therefore, cannot be termed as tangible material for unlocking the already completed assessment u/s 143(3).
We find that in this case apart from filing of Form 10CCB, audited accounts and balance sheets of each unit were filed which expressly reflected the inter unit sales, so, in these circumstances, we find that as regards inter-unit sales, full details were in fact disclosed before the AO during original assessment and specific queries about details of inter-unit sales were asked by the Additional Commissioner while supervising the original assessment in exercise of her powers u/s 144A of the Act, which ultimately was reviewed by the Commissioner u/s 264 of the Act. In the aforesaid circumstances, it must, therefore, be held that the AO, who issued the notices, had not before him any non-disclosure of a material fact and so he could have no material before him for believing that there had been any material non-disclosure by reason of which an escapement of income had taken place.
Ld. DR took our attention to page 247 of PB wherein the assessee had replied dated 27th November, 2006 to the AO, the following of which reads as under:-
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“We confirm in reply to your query that our finished unbranded goods are transferred from one Unit/branch to another unit/branch in the course of local movement as well as Inter State Transfer’s, which has been reflected on the face of the profit and loss account. Since the transaction aforesaid falls in the nature of transfer for Captive consumption, hence no notional profits is being generated /accrued at Transferor branch. The goods which may be subject to transfer in the aforesaid nature, includes Pan Masala and Flavored to bacco in unbranded form. As regard to the Mixing process and person responsible are concerned for the same process, we wish to clarify that normally the Mixing Process of all Inputs viz perfumery compounds, Raw Material to formulate the final outcome is being carried out by the salaried employees of the company. MD is not directly involved in mixing of the Inputs to bring the final outcome sold by us viz. Pan Masala, Gutkha, and Tobacco etc.”
On the basis of the above reply, according to her, the assessee did not state fully and
truly all material facts. According to her, only after the search, the AO got the material
that there is profit shifting which is in violation of section 80IA (8) of the Act, We find no merit in the said submission. The argument does not meet the basic allegation that
there is failure on the part of the assessee to disclose, full and true materiel facts
necessary for assessment. On the contrary, it supports the said claim of the assessee. At
best, it can be assumed that the AO at the stage of assessment could have drawn a
conclusion as is now being contended by the Revenue. Thus, it is also a case of
inference which is different from the earlier inference accepting the claim of assessee.
But certainly it is not a case of failure to disclosure of facts on the part of the assessee.
We, therefore, are bound to hold that the conditions precedent to the exercise of
jurisdiction under section 147/148 of the Act did not exist and the AO had, therefore,
no jurisdiction to issue the impugned notices under section 147/148 in respect of the
relevant assessment i.e. AY 2004-05 after the expiry of four years on this count also.
87 ITA No.5611 & 5581/Del/2013
Next let us look whether the impugned reassessment in the facts of this case be
termed as review or change of opinion of the original assessment u/s 143(3).
From a perusal of the letter of AO dated 13.03.2007 (reproduced supra) and the
AO’s narration of unit-wise activities described by the AO, can it be now said that AO
during original assessment proceedings completed u/s 143(3) of the Act was in the dark
about unit-wise activities carried out by the assessee. So the argument of the Ld. DR,
that flow chart which is mentioned in the reasons recorded threw light for the first time
into the unit-wise transaction of the assessee is bereft of any merits and so cannot be
countenanced. Moreover, as stated earlier also, we take note of the fact that the issue of
deduction u/s 80IC was extensively considered in original assessment passed u/s 143(3) dated 28.12.2006 (P.B. 177-186 at P.B. 178-182) and in the assessment order passed
u/s 143(3) /264 dated 28.03.2007 (P.B. 300-310 at 303-308). Further, we find that
there was even a revision order u/s 264 dated 29-0102007 (P.B.187-198 at 187-190) on
this issue. A perusal of PB 59-62 at 59-60, we find that questionnaire dated 13/01.2006
from Ld. AO issue in original assessment u/s 143(3) asking about procurement of raw
material from different units/divisions and about deduction u/s 80IC, excise duty. And
PB 63-85 is assessee’s letter dated 02.02.2006 giving details of inter unit transfers and
that Delhi office has no role in procurement process and detailed explanation of section
80IC and about income from eligible and non-eligible units, excise duty paid in
Guwahati and Agartala units in peculiar circumstances and about royalty payment to
M/s Flosyn Fragrances (P) Ltd. Excise notifications together with annexure ‘A’, ‘B’,
‘C’ (PB 74-76, 77-81, 82-85). And PB 86-93 at 86-87 is copy of letter dated
10.02.2006, the assessee has submitted about details of excise duty refund in respect of
Guwahati Unit and its relevance for deduction u/s 80IC together with Annexure ‘A’,
‘B’ (PB-90-91, 92-93). We take note that PB 94-124 is copy of assessee’s reply dated
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22.02.2006 filed to AO explaining unit wise sales, nature of unit wise expenses and
profit of various units, unit wise wastage together with all annexure of this letter. We
find that the assessee vide letter dated 09.03.2006 together with all its annexures
showing unit wise stock, party wise details of job work (PB 125-133). And PB 134-
135 is letter dated 10/11/2006 giving detailed note on deduction u/s 80IC. And PB
136-141 is letter dated 20.11.2006 explaining about movement of raw material and
other inputs from various units.
Further, PB 139-138 is letter dated 27.11.2006 explaining about transfers from
one unit to another. Moreover, we take note that PB 316 is a table prepared to show that
contentions raised in the reason recorded are the ones relating to which submissions were made in the original assessment proceedings u/s 143(3), 144A & 264. And PB
921-922 copy of assessee’s reply dated 09/04/2006 filed to Ld. Addl. CIT in
assessment proceedings for AY 2004-05 submitting about the manufacturing of pan
masala. And PB 970-971 copy of assessee’s reply on the issue dated 13/04/2009 to
CIT(A) for AY 2004-05.
Thus, above would show that the issue of deduction u/s 80IC, manner of
computation of deduction u/s 80IC, unit wise transfers of material, impact of excise
duty on the deduction u/s 80IC and royalty having bearing on the deduction u/s 80IC all
have been the subject matter of assessment proceedings, revisional proceeding,
reassessment proceeding on earlier occasion. We find that the assessee had explained
the activities carried out at each of its units situated in different parts of India and filed
balance sheets unit-wise, profit & loss account, inter-unit transfer of materials – local
and inter-state, has been fully and truly disclosed and thus the material particulars
necessary for the assessment during the scrutiny original assessment u/s 143(3) under
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the watchful eyes and supervision of the Additional Commissioner u/s 144; further
revisional assessment under the Commissioner u/s 264 of the Act and thereafter, the
AO passed the original assessment. We find from the queries poised by the authorities
i.e., AO, Additional Commissioner and Commissioner during the original assessment,
clearly bears the fact that the issue which the AO wish the reopen was thread bare
analysed and the assessee had fully and truly disclosed the material fact before all the
authorities as discussed above. There being nothing found out during the course of
search which could have shown any thing adverse to the assessee or different as is clear
from the plain reading of the reading of the reason recorded, the impugned
reassessment is nothing but change of opinion on the same set facts which is not permissible in the eyes of law in view of the above mentioned catena of judicial
decisions and in view of the latest judicial decision from Hon’ble Delhi High Court in
the cases of CIT vs. Kelvinator India Ltd. (supra), CIT vs Usha International Ltd.
348ITR485(Del)(FB) and by Hon’ble Supreme Court CIT vs ICICI Securities Primary
Dealership Ltd. 348ITR299 (SC) and so, the reassessment done is bad in law and has to
be struck down.
Now let us examine the sanction granted by the Commissioner of Income-tax
u/s 151 of the Act and see whether the CIT & Addl.CIT has granted sanction in a
mechanical manner or due application of mind was there taking into consideration the
history of the original assessment.
Ld. DR while countering the argument of the assessee that the satisfaction of the
Ld. Commissioner while giving approval u/s 151 is without application of mind, she
made reference to Hon’ble Supreme Court’s judgement in the case of S. Narayanappa
& Ors. vs Commissioner of Income Tax, (1967) 63 ITR 0219, wherein their Lorship’s
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have held that “There is no requirement in any of the provisions of the Act or any
section laying down as a condition for the initiation of the proceedings that the reasons
which induced the CIT to accord sanction to proceed under S 34 must also be
communicated to the assessee.” Ld. DR contended that the said order has endorsed the
view of the Hon’ble Madras High Court in the case of the Presidency Talkies Ltd vs
First ADDL. ITO.
Ld. DR on this ground further explained that in the case of the assessee, the Ld.
Commissioner has duly accorded his approval by stating that “I am satisfied”.
According to the ld. DR, he has not used words such as “Yes” or “I agree”. Ld. DR
asserted that an administrative Commissioner has considerable experience behind him and can efficiently analyze the satisfaction note put up by the AO along with tangible
material placed before him. Hence, according to her, it cannot be said that he did not
apply his mind before according approval. Moreover, as per her, the adequacy of the
reasons for arriving at the satisfaction by the Commissioner cannot be questioned by
the Courts as held above by the Hon’ble Madras High Court which was approved by
the Hon’ble Apex Court cited (supra). Let us examine the approval granted by the
Commissioner u/s 151 of the Act to adjudicate whether there was application of mind
by the CIT as envisaged in section 151 of the Act for that we have already reproduced
the sanction granted by the Commissioner on 28.03.2011 at pages 59 & 60 above.
On 25.03.2011, when the AO recorded the reasons to reopen and Commissioner
and Addl.CIT granted sanction on 28.03.2011, the previous AO’s letter dated
13.03.2007 (supra) was on record wherein the AO has clearly understood and spelled
out the modus-operandi followed by the assessee. The assessee had disclosed the unit-
wise activities, balance sheets unit wise and the details of transfer of materials between
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units/branches in the course of local movement and inter-state transfers and profit and
loss account was duly filed before the AO and thereafter his order which was passed
under the supervision of Additional Commissioner u/s 144A of the Act, even if
erroneous, cannot be reopened because intended reopening is after 4 years so has to
satisfy the provisio of sec 147. That is if the assessee had disclosed fully and truly
material facts necessary for assessment then, even if the AO has taken an erroneous
view it cannot be reviewed after 4 years as held by Hon’ble Supreme Court in CIT,
Calcutta v. Burlop Dealers Ltd. - 79 ITR 609 (SC). The rationale behind is that
legislature has taken care of a situation wherein, the AO commit error, then
Commissioner has been empowered u/s 263 to suo-motto to interfere and protect the interest of Revenue. So the completed assessment u/s 143(3) after 4 years, if the
assessee has disclosed true and full disclosure of material facts, then the AO cannot
review the original assessment completed u/s 143(3) of the Act.
It has to be kept in mind that the entire assessment record pertaining to the AY
2004-05 was before the AO, and if he had gone through the voluminous document filed
before him by the assessee for claiming 80IC and question raised by the Additional
Commissioner u/s 144A as reproduced above and queries of AO and replies furnished
by the assessee and the AO’s own letter dated 13.03.2007 (supra) describing
elaborately the modus operandi; then the AO would have found everything which he
says about the so called “new discovery” (i.e. as to stage A TO H ) were all in the file.
Here comes the importance of the sanction of the Commissioner u/s 151 for issuance of
notice to reopen after 4 years. We find that the legislature has provided this safeguard
to keep a check on the AO not to reopen casually an assessment which has been
completed u/s 143(3) after 4 years.
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Ld. DR stated before us, that Investigation Wing of the department has
forwarded the information. Whereas a perusal of the reasons recorded, which should be
looked into on a standalone basis, we do not find any whisper or mention of the
informant (Investigation Wing). The AO does not mention the facts contained, if any,
from such communication which is pertinent to the year under consideration. Neither
anything can be added nor omitted from the reasons recorded. The reason recorded
should speak for itself as to the reasons which are intrinsic to make a prudent person
believe in the existence of the belief that there is escapement of income. All that he
says is that it appears that assessee is attributing the entire value addition to the
Guwahati Unit to claim higher amount of deduction u/s 80IC. The AO has not even come to a prima facie conclusion that the assessee is shifting profits to earn higher
amount of deduction. He appears to have had only a vague feeling that the searched
seizure “suggest” assessee’s Guwahati Unit is claiming higher deduction u/s 80IC.
Such a conclusion does not fulfill the requirement of section 151 (2).
We find that on the format which has been reproduced, the Additional CIT and
Commissioner has simply written “Yes I am satisfied” on the same day, i.e. 28.03.2011
which does not in any manner shed any light as to whether there was any application of
mind at all by the aforesaid two senior officers, who were duty bound to have looked in
to carefully the reasons recorded by the AO and seen the history behind the assessment
which was proposed to be reopened by the AO. When a superior authority is given
power by the legislature, to grant sanction to do an act by an authority below him, then
that power needs to be exercised with due care and circumspection and after due
application of mind. Mechanical manner of giving sanction like in this case have not
been approved by the Hon’ble Supreme Court in a similar case in Chhugamal Rajpal
vs. S.P. Chaliha & Ors. – 79 ITR 603 (SC) and Hon’ble High Court of Madhya Pradesh
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in Arjun Singh vs Asstt. Director of Income Tax (M.P.) reported in (2000) 246 ITR 363
(MP). Thus, we are not satisfied that AO had any material before him which satisfies
the requirements of section 147. Therefore, he could not have issued notice u/s 148.
Further, the report submitted by him u/s 151 does not mention any reason and does not
mention which facts were not disclosed by the assessee. We are also of the opinion that
the commissioner has mechanically accorded permission. If only he had read the report
and seen the history of the original assessment, he would not have granted permission.
The safeguard against reopening u/s 151 of the Act has been done by both the superior
authorities very lightly and as held by the Hon’ble Supreme court in Chugamal Rajpal
(supra), the authorities substituted form over substance. Thus, we hold that the sanction granted by the Commissioner u/s 151 is invalid and so, the notice of the AO dated
29.03.2011 is bad in law and has to be necessarily struck down.
Now let us look into the contention raised before us that the assessee was not in
receipt of 143 (2) notice and according to the assessee, the 143 (2) notice had not been
issued at all. However, the ld. DR took us through the order sheet entry dated
24.11.2011, wherein the AO has stated that he has issued the said notice and also
mentions the issuance of 143(2) notice in the notice to the assessee for special audit
and now the assessee cannot take the plea that he is not in receipt of 143(2) notice when
order sheet entry dated 28.11.2011 reveals that the Director and GM (Taxation) of the
assessee company had in fact participated in the proceedings before the AO. So,
therefore, it has to be assumed that the notice dated 24.11.2011 has been received by
the assessee and appearance was in pursuance of the said notice. She also claimed that
since the reassessment order was passed on 22.06.2012, section 292BB applies in full
vigor and since the assessee has not raised the issue of non-receipt of notice u/s 143(2),
the assessee is precluded from raising it before the CIT (A) and so, CIT (A) has rightly
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turned down the objection regarding non-receipt of 143(2) notice. However, the ld. AR
pointed out that despite the Bench directing the DR to file an affidavit in respect to
issuance and service of notice u/s 143(2), the AO, for the reasons best known to him,
has not filed the affidavit, nor the DR could produce a copy of the 143(2) notice
purportedly issued by the AO if any from the reassessment records. So, according to
the ld. AR, the mere entry in the order sheet that 143(2) notice cannot in any manner
satisfy the requirement of law and since 143(2) notice is mandatory, as per Hotel Blue
Moon (supra) as laid down by the Hon’ble Supreme Court, the non-issuance of notice
itself vitiates the entire reassessment proceedings and, therefore, the impugned order is
null in the eyes of law.
We find that the assessee had raised this legal ground before the CIT (A) that
143(2) notice has not been issued / received by the assessee before completion of the
impugned reassessment. Once a legal issue of non-issue/ non-receipt of 143(2) notice
was raised by the assessee before the CIT (A), he was bound to adjudicate this question
of fact; and should have given his finding on the question of fact whether the AO had
issued 143(2) notice or not; and, if so, on which date, mode of service and whether it
was served on the assessee. Rather than doing that, we find that the CIT (A) has simply
stated that 143(2) notice is not required in 153A proceedings and has dismissed this
ground of the assessee in a very casual manner which cannot be countenanced for the
simple reason that the ld. CIT (A) erred in not appreciating the fact that first of all the
impugned order has nothing to do with section 153A of the Act. In this case,
reassessment is for AY 2004-05 which was reopened u/s 148/147 of the Act and 143(2)
notice is mandatory requirement of law as held by the Hon’ble Supreme Court in Hotel
Blue Moon (supra) wherein the Hon’ble Supreme Court has said that in reassessment
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proceedings, 143(2) notice is mandatory and is not a curable defect. Reliance is placed
on the following orders :-
“ACIT & Anr. vs. Hotel Blue Moon: [(2010) 321 ITR 362 (SC)] HELD: “It is mandatory for the AO to issue notice u/s 143 (2). The issuance and service of notice u/s 143 (2) is mandatory and not procedural. If the notice is not served within the prescribed period, the assessment order is invalid Reassessment-----Notice-----Assessee intimating original return be treated as fresh return---Reassessment proceedings completed despite assessee filing affidavit denying serviced of notice under section 143(2)----Assessing Officer not representing before Commissioner (Appeals) that notice had been issued---- Reassessment order invalid due to want of notice under section 143(2)--- Income-tax Act, 1961, ss. 143, 147, 148(1), prov.---- ITO v. R.K. GUPTA [308 ITR 49 (Delhi)Tribu.,”
CIT vs. Vishu & Co. Ltd. In ITA No. 470 of 2008 (2010) 230 CTR (Del) 62 Assessment – validity – Non Service of notice under section 143(2) within time – Notice served on the last date after office hours by affixture as no authorized person was present at assessee’s premises – is not a valid service of notice – Assessment framed in pursuance of such notice is not valid – It is immaterial that the assessee appeared in the proceedings.”
CIT Vs. Cebon India Ltd. (2012) 347 ITR 583 (P&H) 5. We find that concurrent finding has been recorded by the CIT(A) as well the tribunal on the question of date of service of notice. Notice was not served within the stipulated time. Mere giving of dispatch number will not render the said finding to be perverse. In absence of notice being served, the AO had no jurisdiction to make assessment. Absence of notice cannot be held to be curable under s 292BB of the Act.
CIT Vs.Mr. Salman Khan, ITA No.508 of 2010 1. In the present case, reassessment order passed under section 143(3) r/w 147 of the Income Tax Act, 1961 is held to be bad in law in view of the fact that the assessing officer has not issued notice under section 143(2) after issuing notice under section 148 of the Income Tax Act, 1961. This Court in the case of The Commissioner of Income Tax Vis. Mr. Salman Khan [Income Tax Appeal No.2362 of 2009)decided on 1st December, 2009 has considered similar question and has held
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that in the absence of notice under section 143(2) (prior to the insertion of section 292BB), the reassessment order cannot be sustained. In the present case, the reassessment year involved relates to the period prior to the insertion of Section 292BB. In this view of the matter, the appeal is dismissed with no order as to costs. DCIT Vs. M/s Silver Line, ITA No.1809,1504,1505 & 1506/Del/2013 vii. The Hon'ble ITAT of Agra Bench, in the case of ITO v. Aligarh Auto Centre reported in 152 TTJ (Agra) 767, on an identical issue that of the present issue, has recorded its findings as under: "5. We have considered the rival submissions and the material on record. It is not in dispute that the assessee filed original return of income and at the reassessment proceedings, the assessee contended before the AO that the original return filed earlier may be treated to have been filed in response to the notice u/s. 147, which is also supported by order sheet entry dated 09.08.2006 (PB-20). It is also not in dispute that AO never issued any notice u/s. 143(2) of the IT Act. The Revenue merely contended that the CIT (A) should have appreciated the provisions of section 292BB of the IT Act. Section 292 BB of the IT Act provides as under: "292BB. Where an assessee has appeared in any proceeding or co- operated in any inquiry relating to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was- (a) not served upon him; or (b) not served upon him in time; or (c) served upon him in an improper manner: Provided that nothing contained in this section shall apply where the assessee has raised such objection before the completion of such assessment or reassessment." The above provision has been inserted by the Finance Act, 2008 w.ef. 01.04.2008. ITAT, Delhi Special Bench in the case of Kuber Tobacco Product Pvt. Ltd. vs. DCIT, 117ITD 273 held that section 292BB has been inserted by Finance Act, 2008, has no retrospective effect and is to be construed prospectively. The assessment order under appeal is 2001- 02. Therefore, the provision of section 292BB of the IT Act would not apply in the case of the assessee. Further, no notice u/s. 143(2) has been issued or served upon the assessee. Therefore, the decision of Hon'ble Punjab & Haryana High Court in the case of Cebon India Ltd. (supra) squarely applies against the revenue. It was held in this case that absence of notice is not curable defect u/s. 292BB of the IT Act. Considering the above discussion and the case laws cited above, the sole objection of the Revenue is not maintainable. Therefore, the Id.
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CIT (A) was justified in setting aside the entire assessment order. We, therefore, do not find any infirmity in the order of the Id. CIT (A) for interference. " (v) The Hon'ble Mumbai Bench of the ITAT has, in the case of Sanjeev R Arora v. ACIT [IT (SS)A No.103/Muml2004 dated 25.7.2012], recorded its findings as under: "Even, the irregularity in proper service of notice which can be treated as curable under section 292B of the Income-tax Act is only in the cases where the notice under section 143(2) was issued properly and within the period of limitation and the assessee did not raise any objection regarding the service of the notice during the assessment proceedings and also participated in the assessment proceedings then at a later stage the assessee is precluded from raising such objection. Therefore, the provisions of section 292B are not applicable in the case where the assessing officer has not at all issued notice under section 143 (2) within the period as prescribed." 7.9. Taking into account the facts and circumstances of the issue as deliberated upon in the fore-going paragraphs and also in views of the judicial pronouncements (supra), we are of the view that the re- assessment's made for the assessment years under consideration have become invalid for not having served the mandatory notice u/s 43(2) of the Act on the assessee. It is ordered accordingly. 7.10 We have since decided that the re-assessment proceedings concluded u/s 147 r/w 143(3) of the Act were invalid for the AYs under dispute, the issues raised by the revenue in its appeals and also the Cross objections of the assessee firm based on the invalid assessment orders have not been addressed to.” We also rely on the order of the Hon’ble jurisdictional High Court wherein their
Lordships have upheld the order of the Special Bench in Kuber Tobacco Pvt. Ltd. vs.
DCIT (supra) wherein the Tribunal held that section 292BB is prospective in operation
and so is applicable from AY 2008-09 onwards. Since the present appeal before us is
relating to AY 2004-05, and as we are bound by the decision of the Hon’ble
jurisdictional High Court, so section 292BB of the Act cannot come to the rescue of the
revenue in respect to issuance / receipt of notice u/s 143(2) of the Act.
Now, in the present case, the ld. DR could produce before us only an order sheet
dated 24.11.2011 wherein it is written by the AO that notice u/s 143(2) has been issued;
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other than that there is no mention of the mode of service, when it was dispatched etc..
Her assertion that the Director and GM (Taxation) has appeared before the AO on
28.11.2011 goes to show that they have appeared pursuant to the receipt of notice u/s
143(2) cannot be accepted because it is clearly written on the order sheet on 28.11.2011
by the AO that the assessee had submitted objection in respect to reopening of the
assessment and this fact is stated by the AO in the impugned reassessment order.
Moreover, we had given time and directed the ld. DR to file affidavit, if any, of the AO
to support the claim of issuance / dispatch / service of the 143(2) notice, however, we
find that the ld. DR have not filed any affidavit on behalf of the Department to support
their contention that AO in fact had issued the notice. The ld. DR fairly conceded that neither could she trace a copy of the notice u/s 143(2) nor could bring copy of the
dispatch register to buttress her claim that in fact, notice u/s 143(2) had been issued. In
such a scenario, mere order sheet entry without following up by issuance 143(2) notice
as required by law and dispatching the same to the correct address of the assessee and
by merely mentioning that 143(2) notice has been issued in the show cause notice for
special audit cannot substitute the mandatory requirement of law in respect to issue of
notice u/s 143(2) in reassessment proceedings as held by Hon’ble Supreme Court in
Hotel Blue Moon (supra) and by the Hon’ble jurisdictional High Court. Therefore, on
this count also, the assessee succeeds and the entire reassessment proceedings is
vitiated for non-issuance of 143(2) notice by the AO.
Viewed from another angle, It has to be kept in mind that from the reason
recorded to re-open, it is manifest that the search conducted on the assessee on
21.01.2011 was the event from which the AO says he has “reason to belief”
escapement of income. Keeping this factual background in mind, we cannot take our
eyes of the mechanism which gets triggered after a search u/s 132 of the Act, wherein
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the provision of section 153A of the Act kicks in. Now the settled position of law in case of search is that no addition can be made without any incriminating evidence unearthed during the search as held by the Hon’ble jurisdictional High Court in CIT V Kabul Chawla – 61 Taxmann.com 412 (Delhi). If that is so, whether the AO can re- open an assessment without any incriminating material, which would suggest escapement of income of the Year which he proposes to re-open. Here when we again peruse the reasons recorded we do not find any whisper of any tangible material or trace of any incriminating material which could arm the AO invoke section 147/148 of the Act. Moreover, the assessee’s sister concern, Dharampal Premchand Ltd., was also searched in January 2011, and similar additions were made on similar grounds alleging violation of section 80IA(8) for eligible unit claiming 80IC/80IB and appeal preferred by it in ITA Nos.5079, 5080 & 5081/Del/2013 for AY 2005-06 to AY 2007-08 was heard by us and we have held as under :-
“24. Based on this we have come to conclusion that :- a. None of the material seized during the search relates to the year under appeal. b. None of the material found relate to the goods transfer to one unit from other for the period. c. None of the material relates to the purchases from sister concerns. d. None of the material suggest that the material transferred to eligible undertaking is less than the market rate. e. None of the material suggest that the eligible units are not carrying out manufacturing activity, which is stated by assessee. f. None of the material shows that there is inflation of the profit by assessee of eligible undertakings. g. None of the material suggest that appropriation of profit made by the assessee to derive the income of eligible undertaking is incorrect. h. None of the material suggest that eligible units earns ‘more than Ordinary profits’.
100 ITA No.5611 & 5581/Del/2013 In view of above, we confirm that the material found during the course of search is not incriminating which even remotely suggest that assessee’ s claim of deduction u/s 80IC/80 IB is incorrect.” Thus, in the present case, we are afraid, we do not find any material neither tangible nor incriminating material in the hands of the AO to assume jurisdiction to reassess the assessee, so AO has erroneously usurped jurisdiction which law does not permit him to do on the reasons given above, so the entire action of AO is ab-initio void and is quashed.
Before we part, we would like to appreciate both the sides especially Shri R.S. Singhvi and ld. CIT DR, Ms. Nandita Kanchan for their erudite assistance to the Bench, in going through the voluminous documents and tackling legal issues raised in the present appeals.
Since we have allowed the various legal grounds raised by the assessee, other grounds raised by both the parties have become academic and so, are not adjudicated.
In the result, the appeal of the assessee is allowed and the appeal of the revenue is dismissed.
Order pronounced in the Open Court on this 8th day of January, 2016.
Sd/- sd/- (PRASHANT MAHARISHI) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: the 8th day of January, 2016 TS
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