DCIT, NEW DELHI vs. M/S E.I. DUPONT INDIA (P) LTD., GURGAON

Per Prashant Maharishi, AM:

ITA No. 3218/Del/2011 2 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. Commissioner of Income Tax (Appeal)-V, New Delhi(“Ld.CIT(A)”) dated February 09, 2011 under section 250(6) of Income Tax Act, 1961 (“Act”), on the following grounds : 1. Wrongful denial of Advances written off 1.1 That the CIT (A) erred on facts and in law in holding that the appellant failed to provide evidence to show that amounts were already offered to tax in the earlier years. 1.2 That the ld. CIT (A) has erred in law and facts in ignoring the fact that the ld. AO added back the said amount treating it as capital in nature. 2.Wrongful addition on account of Depreciation 2.1. The learned CIT(A) has erred in confirming the action of the Assessing Officer by allowing depreciation @ 15% instead of 25% on cables laid down for running of machinery. 2.2 That ld. CIT(A), admitting that the cables were laid down in factory, has failed to draw distinction between electrical installation and electrical fittings. 3. Re-opening of Assessment 3.1 That the CIT(A) erred on facts and in law in confirming the action of assessing officer in initiating the re-assessment proceedings under section 147 of the Act on the basis of mere change of opinion without any new material fact or information coming to the possession of the assessing officer subsequently and the reassessment order was, therefore, without jurisdiction and bad in law. 3.2 That the ld. CIT(A) has erred on facts and in law in mentioning that there is no discussion of any of the issues in original assessment.”

ITA No. 3218/Del/2011 3 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd.

“Reasons for notice u/s 148 of the IT Act, 1961 On verification of the case records, it has been observed that the assessee has made and allowed the following claims/deductions: I. The assessee has deducted an amount of Rs. 8,12,28,282/- on account of provisions for section 40(a)(i) of the I.T.Act disallowed in last year, now allowable on payment basis but as per computation of last year, the amount added back is Rs. 6,17,56,500/-. II. Advances written off to the extent of Rs. 56,48,790/- has not been added back although it is capital in nature. III. Royalty charges of Rs. 1,03,15,600/- debited to Profit & Loss A/c. should have been disallowed to the extent of 25% in view of Supreme Court decision in the case of Southern Switchgear Ltd. 232 ITR 359. IV. Interest u/s 234B of the I.T.Act has been charges short to the extent of Rs. 6,48,377/-. V. Depreciation on computer has been allowed @ 60% instead of 25% and on electric installations @ 25% instead of 15%.”

ITA No. 3218/Del/2011 4 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. assessing officer after completion of assessment proceedings on which reopening can be based upon. Therefore, he submitted that reopening proceedings are initiated on mere change of opinion for this he relied on several decisions of Hon’ble Delhi High Court and primarily on decision of Hon’ble Supreme Court in case of CIT vs. Kelvinator of India Ltd. 320 ITR 561. He further submitted that as no new material came into the possession of Assessing Officer, reopening is based on material already on record, it is not permitted. He relied on the decision of Hon’ble Delhi High Court in case of Madhukar Khosla v. ACIT 367 ITR 165 and CIT v. Orient Craft Ltd. 354 ITR 536. He further submitted that reopening has been done at the behest of audit party and therefore it is invalid. For this proposition he relied on the orders of Hon’ble Gujarat High Court in case of Raajratna Metal Industries Ltd. v. ACIT and Vodafone West Ltd. v. ACIT, Therefore, he submitted that 148 proceedings are not validly initiated and on this count itself the appeal of the assessee should succeed. 07. Ld. DR relied on the order of AO as well as the CIT (A) and submitted that on going through the orders of lower authorities it is apparent that reopening proceedings has not been challenged. He submitted that reopening has been validly done by AO and no infirmity can be found therein. He further relied on the decision of Honourable Gujarat high court in Gruh Finance Limited V JCIT 123 taxman 196 and of Honourable Delhi high court in case of M/s EMA India Limited V ACIT that reopening is not done on mere change of opinion. 08. We have carefully examined rival arguments and the material on record. We are of the opinion that though assessee has not challenged 148 proceedings before AO and CIT (A), assessee is well within his rights to challenge it now before us as it is a legal issue. The Three fold arguments advanced by AR is that (a) Reopening has been done on the basis of audit objection. (b) There is no new material coming in to possession of AO after original assessment for reopening it.

ITA No. 3218/Del/2011 5 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. (c) There is a change of opinion as in the original assessment proceedings AO has examined the details, did not make any adjustments on that account, and subsequently reopened assessment on same issues. All three proposition raised by the AR of the assessee are examined independently as under:- 09. Ld. AR of the appellant has contended before us that reopening has been done at the behest of the audit party. For this he relied on decision of (a) Honorable Supreme court in Indian And Eastern Newspaper society V CIT 1119 ITR 996 and (b) Honourable Delhi high court in Transworld international Inc. v JCIT 273 ITR 242 and Xerox Modi Corp Ltd V DCIT 350 ITR 308 and (c) Honourable Gujarat high court in Rajratna metal Industries Limited V ACIT and Vodafone West Ltd V ACIT 37 Taxmann.com 158 where audit objection is contested but case is reopened. However, AR of the assessee could not produce any evidence before us that the reopening has been initiated at the behest of audit party. Therefore, in absence of any evidence we are afraid we cannot appreciate this proposition and hence, reject it. 10. Second proposition raised by the AR is that there is no new material coming in to the possession of AO after completing assessment based on which reopening proceedings are initiated. For this, we have perused the reasons recorded by AO for reopening of assessment, which is placed at page no 10 of the paper book submitted by assessee. At the beginning of the reasons, AO has mentioned that information gathered by him is on verification of case records. On further reading, we could not find that there is any new material based on which AO was of the view that there is an escapement of income. On reading of assessment order, also we did not find that there is any new material available with Ao at the time of

ITA No. 3218/Del/2011 6 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. recording of reasons as all the additions have been made on the same material available before AO at the time of original assessment. Ld. DR also could not point out before us any new material coming in to the possession of AO before recording reasons for reopening. Honorable Delhi high court in case of Madhukar khosla V ACIT 367 ITR 165 has quashed where Ao initiated reopening proceedings on appreciation of the same facts already on record. Honourable High court after considering decision of Honourable Supreme court in CIT V kelvinator of India Limited 320 ITR 561 and Honourable Delhi high court in case of case of CIT v Orient Craft Limited 354 ITR 356, despite absence of any explanation by the assessee regarding increase in capital account of the assessee in original assessment proceedings, quashed reassessment notice u/s 148. Honourable high court held that “9. In this case, the reasons provided under Section 148 are that in "absence of the source of the addition with documentary evidence on records, the same is required to be brought on tax net as per provisions of section 68 of the Income tax Act, 1961 as the assessee had offered no explanation about the nature and source of the said additions…" and thus, must be treated as income which escaped assessment. No details are provided as to what such information is which excited the AO's notice and attention. The reasons must indicate specifically what such objective and new material facts are, on the basis of which a reopening is initiated under Section 148. This reassessment is clearly not on the basis of new (or "tangible") information or facts that which the Revenue came by. It is in effect a re-appreciation or review of the facts that were provided along with the original return filed by the assessee. The Supreme Court in Kelvinator of India Ltd. (supra) frowned against such exercise of power: "However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re- assessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. " 10. This Court recollects that even in case of an assessment completed under Section 143 (1), the requirement of recording "reasons to believe" are mandatory - as the text of Section 147 indicates. Rejecting an argument by the Revenue to the contrary, this Court in Orient Craft Ltd.'s case (supra) held that:

ITA No. 3218/Del/2011 7 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. "The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation under Section 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Section 147; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(1). Therefore it is not permissible to adopt different standards while interpreting the words "reason to believe" vis-à-vis Section 143(1) and Section 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made under Section 143(3) cannot apply where only an intimation was issued earlier under Section 143(1). It would in effect place an assessee in whose case the return was processed under Section 143(1) in a more vulnerable position than an assessee in whose case there was a full-fledged scrutiny assessment made under Section 143(3). Whether the return is put to scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of proving valid reasons to believe could be circumvented by first accepting the return under Section 143(1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression "reason to believe" in cases where assessments were framed earlier under Section 143(3) and cases where mere intimations were issued earlier under Section 143(1)may well lead to such an unintended mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed. 13. Certain observations made in the decision of Rajesh Jhaveri (supra) are sought to be relied upon by the revenue to point out the difference between an "assessment" and an "intimation". The context in which those observations were made has to be kept in mind. They were made to point out that where an "intimation" is issued under section 143(1) there is no opportunity to the assessing authority to form an opinion and therefore when its finality is sought to be disturbed by issuing a notice under section 148, the proceedings cannot be challenged on the ground of "change of opinion". It was not opined by the Supreme Court that the strict requirements of section 147 can be compromised. On the contrary, from the observations (quoted by us earlier) it would appear clear that the court reiterated that "so long as the ingredients of section 147 are fulfilled" an intimation issued under section 143(1) can be subjected to proceedings for reopening. The court also emphasised that the only requirement for disturbing the finality of an intimation is that the assessing officer should have "reason to believe" that income chargeable to tax has escaped assessment. In our opinion, the said expression should apply to an intimation in the same manner and subject to the same interpretation as it would have applied to an assessment made under section 143(3). The argument of the revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri (supra) would also appear to be self-defeating, because if an "intimation" is not an "assessment" then it can never be subjected to section 147 proceedings, for, that section covers only an "assessment" and we wonder if the revenue would be prepared to concede that position. It is nobody's case that an "intimation" cannot be subjected to section 147 proceedings; all that is contended by the assessee, and quite rightly, is that if the revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. In other words, the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under section 143(3) and another applicable where an intimation was earlier issued under section 143(1). It follows that it is open to the assessee to contend that notwithstanding that the argument of "change of opinion" is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the assessee to challenge the reasons recorded under section 148(2) on the ground that they do not meet the standards set in the various judicial pronouncements."

ITA No. 3218/Del/2011 8 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. 11. 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 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, 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. The impugned notice, the AO's order rejecting the objections, and the arguments of the Revenue nowhere indicate how the AO was impelled to seek re- opening of the assessee's case, as distinguished from the several other completed assessments.”

ITA No. 3218/Del/2011 9 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. details and Ao perused them and did not take any adverse cognizance in original assessment. Sr Particular reasons of reopening Details asked for by Details of reply no AO filed by Assessee 1 Disallowance proposed on account Para No 24 of the Para No 15 of letter of u/s 40a (i) notice dated dated 06/09/2006 18/8/2006 AO has where in reply to asked for the details para no 24 of notice of compliance with is submitted along section 40a with with an annexure respect to 15. Annexure 7 of expenditure in that submission also foreign currency givens the details of royalty payments made by the assessee vide Letter of RBI dated 9/11/2002. In the computation of total income submitted by the assessee the amount of disallowance u/s 40a (i) is given as well as deduction of the expenditure on payment of TDS basis is also disclosed. 2 Advances written off Para No 15 of the Details ae available notice dated at schedule XVIII 18/8/2008 of the balance sheet 3 Royalty charges Para no 8 of the Para No 7 of the notice dt. 18/8/2008 reply dated 06/9/2006 4 Depreciation on computers allowed Point No 6 of Reply of assesse @ 60 % instead of 25 % and on notice dated dated 06/9/2006 at electric Installation @ 25 % instead 18/8/2008 para no 6 of 15 % 4 Interest u/s 234B is short charged This is the charge to be made by AO while framing assessment order and Interest short charged does not relate to Income

ITA No. 3218/Del/2011 10 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. (i) The expression 'change of opinion' postulates formation of opinion and then a change thereof. In the context of section 147, it implies that the Assessing Officer should have formed an opinion at the first instance, i.e., in the proceedings under section 143(3) and now by initiation of the reassessment proceeding, the Assessing Officer proposes or wants to take a different view. (ii) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by principle of 'change of opinion'. (iii) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations, it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer, had formed an opinion in the original assessment, whether or not he had recorded his reasons in the assessment order. 16. In this case, an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer did not make any addition in the assessment order. Respectfully following Honourable Delhi high court in CIT V Usha International (FB) (Supra) in such situations, it should be accepted that the issue was examined but the Assessing Officer, did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer, had formed an opinion in the original assessment, whether or not he had recorded his reasons in the assessment order. Therefore we do not have any hesitation to hold that the reopening in this case is initiated solely on the basis of ‘Change of Opinion’ which cannot be sustained. 17. In view of this ground no 3 of the appeal is allowed. 18. As we have held that reopening is not sustainable, we do not adjudicate other grounds of the appeal of the assessee as they become infructuous. 19. In the result appeal of the assessee is allowed. ITA No 2351/del/2011 (Appeal of revenue)

ITA No. 3218/Del/2011 11 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd. 20. Now we take up appeal of the revenue where in revenue has challenged the addition of Rs 25,78,900/- deleted by CIT (A) on account of royalty. 21. In view of our decision in appeal of assessee In ITA No 2357/Del/2011 wherein allowing ground number three of that appeal we have held that reopening proceedings initiated are not sustainable in absence of any new tangible material and even otherwise is based on mere change of opinion. This appeal of revenue has emerged from the same reopening proceedings, and hence consequently we dismiss the appeal of revenue. 22. In the result, we allow appeal no ITA No 3218 /Del/2011 preferred by assessee and dismiss appeal no. 2351/Del/2011 preferred by revenue. (Order Pronounced in the Court on 18 /11/2015)

Sd/- Sd/- (A.T.Varkey) (Prashant Maharishi) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 18 /11/2015 *B. Rukhaiyar* Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR

ITA No. 3218/Del/2011 12 CO. No. 2357/Del/2011 E.I.DuPont P. Ltd.

Date Initial 1. Draft dictated on 08/11/2015 2. Draft placed before author 10/11/2015 3. Draft proposed & placed before the second member 4. Draft discussed/approved by Second Member. 5. Approved Draft comes to the Sr.PS/PS 6. Kept for pronouncement on 7. File sent to the Bench Clerk 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.