Validity of Reassessment based on Audit Report/Balance Sheet Submitted during Original Assessment

Citation: ACIT Vs. Super Cassettes Industries Ltd.  (ITAT Delhi), I.T.A No. 5263/Del/2012 [Assessment Year : 2004-2005] Date of pronouncement: 08.07.2015

Brief Facts:

1. The assessee is a company, that filed its income tax return for the Assessment Year 2004-05, declaring an income of Rs. 10,40,11,590/-. Scrutiny Assessment under section 143(3) of the Income Tax Act, 1961 was completed on 22.03.2005.

2. After that, Assessing Officer issued notice u/s 148 of the Income Tax Act, 1961 and gave the following reasons for the same:-

a) The assessee company showed Unsecured Loans from Directors in the Balance Sheet, amounting to Rs. 4,13,61,284/- as compared to Annexure-1 to Form 3CD of Audit Report, wherein the amount was 17,76,66,492/-. The differential amount i.e. Rs. 13,63,05,208/- was not accounted for, in the books of assessee company.

b) ‘Repairs of Machinery and Building & Purchase of Capital Items’ amounting to Rs. 53,64,710/- and ‘Design and Art Work’ amounting to Rs. 12,92,529/- were wrongly debited to Profit & Loss Account by the assessee company. The aforementioned expenses were capital in nature and had to be disallowed and added to assessee’s income subsequently.

3. The AO subsequently issued notice u/s 142(1) and completed the assessement, after treating expenditure on design and art work, and repairs on machinery and building aggregating to Rs. 66,57,239/- as capital expenditure.

4. The assessee submitted, before the Ld. CIT(A), that the reassessment proceedings u/s 147 read with section 148 were without jurisdiction and bad in law. After considering detailed submissions by assessee’s ld. Counsel, CIT(A) quashed reassessment proceedings for the reasons below:

a) Reassessment proceedings were initiated after expiry of four years. Since there was no failure on assessee’s part to disclose fully and truly all the material facts that were necessary for assessment, no reopening could be done, in the view of proviso to section 147.

b) The reasons given by AO were not on the basis of any new material, but based on Audit Report under Form 3CD. It was a case of change in opinion because the assessee had given detailed replies to questionnaire at the time of original assessment proceedings.

c) AO rejected the objections raised by the assessee to the reasons recorded which is against the principle laid down by Hon’ble Supreme Court in the case of GKN Driveshaft Ltd. 259 ITR 90. In case of GKN Driveshaft Ltd. 259 ITR 90, the Hon’ble Supreme Court laid down the principle that when a notice under section 148 of the Income-tax Act, 1961, is issued, the proper course of action for the noticee is to file the return and, if he so desires, to seek reasons for issuing the notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order.

5. The Revenue is in appeal before ITAT Bench against the aforementioned order of Ld. CIT(A).

Revenue Contention

The Revenue contended that there were sufficient reasons for reopening of assessment under section 148 of the Income Tax Act, 1961. Both the aforementioned reasons were appropriate and Revenue was correct in serving notice after four years, as the proviso to section 147 was not applicable in assessee company’s case.

Assessee Contention

1.  Ld. Counsel for assessee company submitted that the notice under section 148 of the Act was without jurisdiction and hence, the same was bad in law.

2. The Ld. CIT(A) was correct in quashing the reassessment proceedings and the reasons provided for quashing were also suitable.

Court Order

1. The reopening has basically been done for two reasons – the first one being the alleged difference between Unsecured Loans from Directors in the Balance Sheet and Unsecured Loans from Directors in Audit Report under Form 3CD; and the second one, considering repairs to building & machinery and purchase of capital items and design and art work as capital expenditure.

2. Thus, on bare perusal of the reasons given by AO, it becomes clear that AO has nowhere mentioned about failure on the part of the assessee to disclose fully and truly all material facts.

3. The reopening solely on the basis of different figures appearing in the Balance Sheet and Form 3CD with respect to same items, could not be done without proper application of mind before recording the reasons. The absence of application of mind comes into light from the fact that the AO himself did not do any addition on this count while making the original assessment.

4. Regarding issue relating to nature of expenses of repair and maintenance to building and purchase of capital items and design and art work expenses, during the course of original assessment proceedings, the assessee company had filed sufficient replies to all the queries of AO with respect to this and each and every explanation was furnished.

5. It is evident from the above that there was no failure on assessee’s part to disclose fully and truly all material facts that were necessary for concluding about the nature of expenditure incurred by the assessee company. AO applied his mind during the assessment proceedings and came to conclusion that amounts were allowable as revenue expenditure, after disallowing Rs. 5,88,350/- .

6. All the aforementioned facts regarding the expenditure prove that reopening has been done purely on the basis of change in AO’s opinion regarding the items.

7. The same is not permissible in the view of Hon’ble Supreme Court’s decision in case of CIT Vs. Kelvinator of India Ltd. 320 ITR 561, wherein it has been held as under:

“Post- 1st April, 1989 power to reopen is much wider. However, one needs to give schematic interpretation to the words ‘reason to believe’ failing which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of ‘mere change of opinion’ which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has got power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an inbuilt test to check abuse of power by the AO”

8. ITAT agreed with the view taken by CIT(A) with regard to Hon’ble Supreme Court decision in case of GKN Driveshaft Ltd. (Supra). ITAT further stated that the AO was required to dispose of the assessee’s objections to the reasons recorded by passing a reasoned order and not summarily rejecting the same without any specific finding. On this basis reassessment proceedings could not be quashed but the mater could be restored to the file of AO. However, since we find that the reasons recorded do not meet the mandate of proviso to section 147 and are purely on the basis of change of opinion, therefore, the reasons recorded by AO cannot be sustained in law. In view of above discussion, we uphold the order of ld. CIT(A).

9. The appeal of Department is, thus, dismissed.