Gujarat H.C : There was no allegation that there was failure on the part of the assessee to disclose material facts fully and truly all material facts and totally ignoring that in this case Explanation 1 to Proviso 1 of Section 147 of the Act is squarely applicable

High Court Of Gujarat

CIT-I Vs. Ankit C Maheshwari

Section 37(1)

Assessment Year 2005-06

M.R. Shah And K.J. Thaker, JJ.

Tax Appeal No. 432 Of 2014

June 10, 2014

ORDER

M.R. Shah, J. – Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’), Dated : 16.09.2013, passed in ITA No. 742/Ahd/2013 for the Assessment Year 2005-2006, the Revenue has preferred the present Tax Appeal with the following proposed substantial questions of law;

“(A)Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified in holding that there was no allegation that there was failure on the part of the assessee to disclose material facts fully and truly all material facts and totally ignoring that in this case Explanation 1 to Proviso 1 of Section 147 of the Act is squarely applicable?

(B) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified in holding that requirement of proviso 1 to Section 147 of the Act was not complied with though no opinion was formed by the Assessing Officer in the original assessment order on the issues on which case was reopened?”

2. The facts leading to the filing of the present appeal, in nutshell, are as under;

3. That the assessee filed return of his income under Section 143(3) of the IT Act (hereinafter referred to as ‘the Act’). That the regular assessment under Section 143(3) of the Act was completed on 26.12.2007, determining the total income of the assessee at Rs. 90,06,460/-, after making additions of Rs. 33,90,267/-, on account of disallowance of commission/brokerage and Rs. 79,358/- out of the administrative expenses. Subsequently, a ratification order was passed under Section 154 of the Act on 23.01.2008, disallowing the interest on unsecured loans to the extent of Rs. 5,86,907/-. That the matter traveled till the Tribunal and the Tribunal deleted the addition on account of disallowance of commission to the extent of Rs. 31,63,732/- and the interest on unsecured loans of Rs.5,86,907/-. Thereafter, the AO reopened the case under Section 147 of the Act and issued a notice under Section 148 of the Act on 23.03.2011, after recording the reasons, as noted herein below.

“1. The assessee has filed its return of income on 30.10.2005 declaring total income at Rs. 55,36,835/- and the same was processed u/s. 143(1) of the Act on 26.12.2005 and the return income of the assessee was accepted as it is. This case was selected for scrutiny and assessment proceedings u/s. 143(3) of the I.T. Act 1961 were completed on 26.12.2005 determining total income of the assessee at Rs. 90,06,460/- making addition of Rs. 33,90,267/- on account of disallowance of commission/brokerage expenses and Rs. 79358/- out of disallowance of administrative expenses. Further in this case rectification order u/s. 154 of the Act was passed on 23.01.2008 and thereby disallowance of interest on the unsecured loans of Rs. 5,86,907/- was made and total income of the assess was determining at Rs. 95,93,367/-.

2.Perusal of assessment records revealed that the assessee made huge payment of interest during the FY relevant to A.Y. under consideration amounting to Rs. 57.06/- lacs on secured and unsecured loans obtained. On the other hand the assessee extended loan and advances and made investment to the tune of Rs. 93.52 lacs mentioned in schedule 10 and 7 appended to the balance sheet as under:

Schedule-7 Investment Rs. In Lac
Corporation Bank RD 3.63
Fixed Deposit 0.97
Fixed Deposit 8.77
Fixed Deposit 5.12
ICICI Safety Bond 0.20
ICICI Safety Bond 0.30
Shares-Kothari Info Tech. Ltd. 53.36
Shares-Cham Chemichals and Tech Ltd. 0.08
72.43
Schedule 10-Loan/Adv./Deposit Rs. In Lac
Bhagara Ployfab P Ltd 5.00
Bilkishbanu Mosaji Multani 1.00
HP Mahida 0.40
Harsh Synthetics 3.00
JB Patil 1.00
Kavita Maheshwari 2.77
Kothari Info Tech 4.48
Maheshwari Impex 0.59
SPG International 2.35
Shantilal G Patil 0.50
21.09

A + B = 93.52 Lac

However no interest/returns has been reflected as received in P & L Account. On loan obtained therefore, required to be disallowed and added back to the total income in view of the provision of section 37 of the Act.

Claiming of full interest and allowance of the same resulted into under assessment of income to the extent of Rs. 7.96 lacs with tax effect of Rs. 2.92 lac including interest and penalty of Rs. 2.63 lac.

3. As seen from the records the assessee paid rent to the tune of Rs. 10.68 lacs and debited to P & L Account. However, the tax required to be deducted at source as per provisions of section 1941 was not deducted and paid into the Government Account. Tax was deducted and paid to the extent of Rs. 7.03 lacs on payment of commission and interest as show at Sr. No. 27 of form 3 CD. The liability on this account was also not reflected in the balance sheet it proves that no tax was deducted at source from payment of rent. This resulted into non-deduction of tax at source of Rs. 1.82 lacs including interest and penalty of Rs. 1.60 lacs.

In view of the above facts, I am satisfied that there is certainly under assessment of income and escaped assessment of income within the provisions of section 147 of the I.T. Act 1961 and this is fit for re-opening.”

4. That the assessee appeared before the AO in the re-assessment proceedings and furnished the necessary details. That, thereafter, AO passed the re-assessment order and considered the income of the assessee at Rs. 1,10,31,811/- and further passed an order to issue demand notice under Section 156 of the Act as well as issued notice under Section 274 read with Section 271(1) (c) of the Act.

5. That feeling aggrieved and dissatisfied with the re-assessment order passed by the AO, the assessee preferred an appeal before the CIT(A) and by order dated 24.12.2012, the learned CIT(A) allowed the said appeal and quashed and set aside the re-assessment order by observing that all the conditions which are required to be fulfilled while carrying out re-assessment under Section 147 of the Act were not complied with. The learned CIT(A) also observed that the initiation of the re-assessment proceedings were after four years. The learned CIT(A) observed as under in Paras-2 and 3;

“2.3 I have considered the facts of the case, basis of reopening and submissions of appellant. As it may be seen from the reasons recorded by AO, the basis of reopening the assessment was that he was not able to make addition of interest amount on account of loans and rental income due to non deduction of tax during original assessment proceedings. Therefore, he undertook the remedial action by issuing notice u/s.148 of the I.T. Act. However, the action of AO of reopening of assessment on the basis of above grounds is not justifiable. To start proceedings u/s. 147 of I.T. Act, AO must have ‘reason to believe’ and this belief should be based on reasons which are relevant and material. The change of opinion or forming an opinion on any issue cannot be termed as reason to form belief for reopening the assessment. In this case, AO has no new material to form the opinion that there is escapement of income by appellant. The details related to interest on loans and rental incomes were on record in the return of income itself. All the details in respect of income disclosed in the original return of income were examined and books of account were verified by AO during the regular assessment proceedings and additions were also made. On account of interest on loans, rectification order u/s. 154 was also passed after the completion of regular assessment. But, all these additions were deleted by appellate authorities. Not being able to tax the additional income, now the AO has taken the recourse of reassessment proceedings by issuing notice u/s. 148 of the LT. Act on the basis of facts already available with AOI during the regular assessment proceedings. In such situation, taking action u/s. 147 of I.T. Act on the basis of change of opinion cannot be allowed. As it was held in the case CIT v. Bhanji Lavji [1971] 79 ITR 582 (SC) by Hon’ble Supreme Court that when the primary facts necessary for assessment are fully and truly disclosed, the ITO will not be entitled on change of opinion to commence proceedings for the assessment. Similarly, if he has raised wrong legal inference from the facts disclosed, he will not, on that account, be competent to commence reassessment proceedings. Similarly, in the case of ITO v. Nawab Mir Barkat Ali Khan Bahadur [1974] 97 ITR 239 (SC), Hon’ble Supreme Court held that having second thoughts on the same material, and omission to draw the correct legal presumption during original assessment do not warrant the initiation of proceedings u/s. 147 of I.T. Act. However, from the facts of this case, it can be seen that the AO was not having any new factual information in his possession to form the opinion that there is any escapement of income. He has merely formed his opinion on the basis of facts available on record in the return of income of appellant. For a long time the facts of the case remained accepted by AO and suddenly after almost five years, AO changes his opinion that the interest and rental expenses are not allowable. Such change of opinion cannot be held valid in the light of aforesaid decision of Hon’ble Supreme Court. Moreover, since the notice u/s. 148 has been issued beyond 4 years from the end of the relevant assessment year, AO ought to have fulfilled the condition as per proviso to Section 147 of the Act by establishing with the evidence that the assessee has not made true and full disclosure of material facts necessary for his assessment. Contrary to this, in the reasons recorded for reopening the assessment, AO himself has stated in para 2 that the ‘perusal of assessment records revealed’ that interest and rental expenses have escaped assessment. It means all the true and full material facts were already available in the assessment records of appellant. Thus, the AO has also failed to prove that the assessee has not made true and full disclosure for the purpose of reopening the assessment proceedings. In view of the facts and legal position as discussed above, reopening of assessment cannot be held legal, therefore, the whole reassessment proceedings stand annulled.”

6. Feeling aggrieved and dissatisfied with the order passed by the CIT(A) in allowing the appeal and in setting aside the reassessment order, the Revenue preferred the appeal before the learned ITAT. The learned Tribunal dismissed the appeal and confirmed the order passed by CIT(A) by observing as under at Paras-3 and 4;

“3. We have considered the rival submissions. We find that the assessment was annulled by the ld. CIT(A) on this basis that as per the reasons recorded by the Assessing Officer for re-opening the assessment u/s. 148 of the IT Act, 1961, this is not the allegation of the AO that there is failure on the part of the assessee to disclose material facts truly and correctly. He has also noted that in the present case, the original assessment was completed by the AO u/s. 143(3) of the Act and the re-opening is after four years from the end of the relevant assessment year. As per the assessment order, we also find that it is noted by the AO in the assessment order that the original assessment was completed u/s. 143(3) of the Act on 26/12/2007 and he has also noted that notice u/s. 148 of the Act was issued to the assessee and served upon him on 23.03.2011. The assessment year involved is A Y 2005-06 and, hence, the re-opening of the assessment is after four years and therefore, the 1st proviso to section 147 of the Act is applicable. By this proviso, the re-opening is possible only if income has escaped assessment because of failure on the part of the assessee to disclose fully truly all material facts. The assessee had submitted a paper-book containing 79 pages but since the same was submitted late only on 10.09.2013 and the hearing was fixed on 12/09/2013, we do not consider any other document in the paper-book except the reasons for re-opening of the assessment available on page Nos. 8 & 9 of the paper-book because the same are available in assessment records also. As per the reasons recorded by the AO for re-opening of the assessment, it is seen that it is noted by the AO in the reasons that the reasons are on the basis of perusal of the assessment records and there is no allegation that there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. In the present case, it is established that the requirement of first proviso to Section 147 are not being complied with and therefore, the re-opening after four years is not valid. Therefore we uphold the findings of the ld. CIT(A) regarding annulment of the assessment.

4. Since, the assessment itself is annulled by the ld. CIT(A) and his order on this aspect has been upheld by us in above paragraph, other grounds raised by Revenue in its appeal and the grounds raised by the assessee in its Cross Objection do not call for any adjudication.”

7. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Tribunal, the Revenue has preferred the present Tax Appeal for consideration of the aforesaid proposed questions of law.

8. Mr. Sudhir Mehta, learned Advocate appearing on behalf of the appellant, has vehemently submitted that the learned Tribunal has materially erred in holding that the reassessment was initiated beyond the period of four years. It is, further, submitted that the learned Tribunal has materially erred in holding that all the conditions of reassessment, as per Section 147 of the Act, are not fulfilled. It is, therefore, submitted that the learned Tribunal has materially erred in holding that the reassessment proceedings were bad.

No other submission has been made.

9. We have heard Mr. Sudhir Mehta, learned Advocate appearing on behalf of the appellant-Revenue and have gone through the orders passed by the learned CIT(A) and the learned ITAT. We have also gone through the reasons recorded by the AO for reopening the assessment under Section 148 of the Act, which are reproduced herein above. Considering the above, it is required to be noted that, as such, in the reasons recorded by the AO for reopening the assessment under Section 148 of the Act, it was not the contention of the AO that there was any failure on the part of the assess to disclose the material facts truly and correctly. At this stage, it is required to be noted that, as such, there are concurrent findings recorded by both the authorities below that reassessment proceedings were initiated/assessment was reopened beyond a period of four years. We are in complete agreement with the view taken by the learned CIT(A) and ITAT that the reassessment was opened after a period of four years and if that be so, unless and until it was alleged or established that there was any failure on the part of the assessee to disclose the material facts truly and correctly, it was not permissible to AO to reopen the assessment under Section 148 of the Act. Even in the reasons recorded by the AO, it is not alleged that there was failure on the part of assessee to disclose the material facts truly and correctly, and hence, no error has been committed by the learned CIT(A) and ITAT in holding that the reassessment proceedings were bad in law.

10. In view of the above, we see no reason to interfere with the impugned order passed by the learned CIT(A), dismissing the appeal, and as confirmed by the order of the ITAT and no substantial question of law arise. The present appeal deserves to be dismissed and is dismissed, accordingly.

[Citation : 366 ITR 146]

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