Delhi H.C : whatever material or explanation in respect of the issues sought to be raised in the second reassessment notice to the assessee were part of the record and could have been noticed in the first reassessment proceedings.

High Court Of Delhi

CIT vs. Central Warehousing Corporation

Section : 147, 10(29),

Assessment Year : 2002-03

S. Ravindra Bhat And R. K. Gauba, JJ.

IT Appeal No. 575 Of 2012

January 15, 2015

JUDGMENT

S. Ravindra Bhat, J. – The Revenue is aggrieved by the order of the Income-tax Appellate Tribunal (hereinafter referred to as “the ITAT”) dated July 15, 2011, in I. T. A. No. 1874/Del/2011. The Income-tax Appellate Tribunal affirmed the order of the Commissioner of Income-tax (Appeals) but had set aside the assessee’s second reassessment, pursuant to the notice under section 147 of the Income-tax Act, 1961, for the assessment year 2002-03. It is urged that the findings are erroneous that the reopening of the proceedings was warranted in the circumstances of the case. The assessee, a statutory Central Government corporation, filed its return declaring loss of Rs. 2,65,77,24,891. The return was processed under section 143(1). It was later selected for scrutiny, and notice was served upon the assessee on October 17, 2003, under section 143(2). During the course of the scrutiny assessment, the Assessing Officer (“the AO”) framed a detailed questionnaire concerning 18 issues, and asked the assessee to furnish replies and relevant details. The assessee furnished the requisite details in a detailed reply and also annexed the necessary documents. The Assessing Officer, thereafter, completed the assessment on February 22, 2005. In this initial assessment, the Assessing Officer disallowed certain amounts including the exemption claimed under section 10(29) of the Act as well as certain categories of income and purchase. (while the matter stood thus, on March 17, 2006, the Assessing Officer issued a reassessment notice, this time alleging that the exemption claimed under section 10(29) was inadmissible. He sought to add back a sum of Rs. 15,90,10,698. This was premised also, inter alia, on the footing that section 37 could not have been sought recourse to, by the assessee in the circumstances. This reassessment notice (hereinafter called the “first reassessment notice”) was set aside by the Appellate Commissioner on October 25, 2007. The matter attained finality.

2. Yet again, on December 20, 2007, the Assessing Officer issued a second reassessment notice under section 147-this time not only including the amounts sought to be added earlier but also other amounts such as prior period expenses, deferred expenditure claimed for purchase of dunnage, its treatment in the books and the debiting of unabsorbed expenditure in the profit and loss account. This reassessment proceedings and the order was challenged by the assessee. The Commissioner of Income-tax (Appeals), by order dated February 11, 2011, was of the opinion that the second reassessment notice in fact was an impermissible “change of opinion”. He also considered the merits of the additions and recorded that they were untenable. The Revenue’s appeal to the Income-tax Appellate Tribunal was rejected by the impugned order.

3. It is argued that an examination of the assessee’s reply to the questionnaire clearly reveals that while it had originally not claimed these allowances, it did so in the revised return filed by it. This has led to the enquiry by the Assessing Officer who ultimately chose not to pursue the matter in the light of the assessee’s reply dated February 10, 2005. The Assessing Officer categorised this as “reason to believe”, under section 147 of the Act and sought to justify the reopening in the circumstances of the case. Counsel for the assessee urged that upon the opening of the original reassessment pursuant to the first reassessment notice dated March 17, 2006, it was open to the Assessing Officer to look into the entire record and bring to tax such amounts as found necessary. Not having do so, the Assessing Officer could not have fallen back on the record, in the absence of “tangible material” or fresh reason, which alone could have provided him the rationale to issue a reassessment notice.

4. So far as the questions sought to be urged is concerned it is as evident from the above discussion that the second reassessment notice was based upon re-appreciation of the original record. This court notices that the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal have concurrently ruled that whatever material or explanation in respect of the issues sought to be raised in the second reassessment notice to the assessee were part of the record and could have been noticed in the first reassessment proceedings.

5. Furthermore, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal considered elaborately on the merits of the addition and held that the effort of the Assessing Officer to bring such amounts to tax was not justified. The Income-tax Appellate Tribunal pertinently noticed as under :

“The formation of such belief exhibiting the escapement of income or the reasons should have a direct nexus with the information enabling the Assessing Officer to form such belief. The interdiction provided in the first proviso appended to section 147 puts and embargo upon the powers of the Assessing Officer. It contemplates that if an assessment under section 143(3) has been made for the relevant assessment year and four years have expired from the end of the relevant assessment year then such notice would not be issued 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 section 142(1) or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. Admittedly, the assessee has filed the return under section 139 of the Income-tax Act, 1961. The only requirement left is whether the assessee can be charged with an allegation that it failed to disclose all material facts fully and truly in respect of the income escaped. Thus, the operative force of the proviso is that the Assessing Officer should demonstrate, failure of the assessee to disclose all material facts fully and truly, which gives rise to escapement of the income. In this connection, we have gone through the record carefully. The first item referred to by the Assessing Officer in the reasons relates to the allowability of certain expenditure which has to be ascertained whether incurred wholly and exclusively for the purpose of the business or not. The Assessing Officer, thereafter, referred to certain expenditure. In the questionnaire issued on January 14, 2005, at Sr. No. 5, the Assessing Officer called for the explanation of assessee on one item is :

‘Expense incurred on engineering division has been charged to revenue instead of capitalising it with the project/capital assets.’

Apart from this one query, the assessee has placed on record details of all other expenses referred to by the Assessing Officer in the reasons. The learned counsel for the assessee at the time of hearing, referred schedule No. 5 at pages 125 and 126 of the paper book which contains details of miscellaneous expenses on page 125 at Sr. No. 5, the assessee has made a reference to the deferred revenue expenses written off. Similarly at Sr. No. 8, it refers to dunnage. At Sr. No. 24, the expenses relating to quality improvement expenses (ISO) has been shown and at Sr. No. 32, the expenses related to unabsorbed overhead on capital work has been shown. The learned counsel for the assessee, thereafter, referred to page 133 and pointed out that the assessee has placed on record the income and expenditure account relating to prior periods. In this connection, it has referred loss on write off assets also which is sought to be enquired by the Assessing Officer in these reasons. The net Rs. 1,70,42,520 worked out by the assessee in the income and expenditure account has duly been taken in the computation of income. For buttressing this, the learned counsel for the assessee drew our attention towards annexure B at page 22 of the paper book wherein computation of assessable income/loss has been placed on record. In this computation, he pointed out that the prior period expenditure charged to the profit and loss account has been added at Rs. 1,70,42,520. The learned counsel for the assessee similarly explained the other items. After going through all the details, we find that the assessee has disclosed all the material facts fully and truly. The Assessing Officer has merely made a mention in the reasons that it failed to disclose all material facts fully and truly. We have gone through the accounts which were made available to the Assessing Officer in the original round of litigation. When the Assessing Officer sought to reopen the assessment at the first instance, he did not make a reference to these aspects though he made a reference to the allowability of expenses under section 37 of the Income-tax Act, 1961. In view of the above discussion, we are of the view that the assessee has demonstrated on the record, that all facts relevant for the assessment of its income have been declared by it fully and truly.”

6. This court had in the judgment reported as Honda Siel Power Products Ltd. v. Dy. CIT [2012] 340 ITR 53/[2011] 197 Taxman 415/10 taxmann.com 2 (Delhi) held that page 81 paragraph 13 held that a question as to whether there is failure or omission to disclose fully and truly material facts as essentially one of fact. This was affirmed by the Supreme Court in Honda Siel Power Products Ltd.case (supra). The Supreme Court ruling in CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 is authority for the view that the “reason to believe” on which a reassessment can be validly ordered should necessarily be based on “tangible material” which an Assessing Officer comes by after the assessment. Necessarily, such material is outside the record. Straying from this clear path would be sliding down the slippery slope into a quagmire of reappreciation of existing material and-even the process of reasoning which is impermissible as it is a forbidden “merits review”. Reassessment, if permitted in such instances would be a route which (to borrow the phrase from another context) “unlocks the gate which shuts” the Assessing Officer’s review on the merits (Attorney General for New South Wales v. Quin [1990] 64 Aust LJR 237).

7. In view of the above discussion this court is of the opinion that impugned order does not suffer from any infirmity.

8. The appeal is, consequently, dismissed.

[Citation : 371 ITR 81]

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