Reopening to review original assessment not permitted

Brief of the Case

Delhi High Court held In the case of Munjal Showa Limited vs. DCIT that it is clear that the AO did not apply his mind independently and went by the order of the CIT. It is a settled law that a quasi-judicial authority cannot afford to act on the direction and in the present case on the direction of a superior officer. In Anirudhsinhji Jadega v. State of Gujarat (1995) 5 SCC 302, it was reiterated by the Supreme Court that once a discretion is vested with a certain authority, he alone should exercise that discretion vested under the statute and if he acts in accordance with the direction or any compliance with some higher authorities instruction, it would be a case of failure to exercise discretion altogether. Also this Court in Lahmeyer Holding GMBH v. Deputy Director of Income Tax (2015) 376 ITR 70 (Del), a distinction has been made as to the power to review and the power to re-assess. In the garb of reopening the assessment, the AO cannot be permitted to review the original assessment. That is in the domain of the CIT under Section 263, subject of course, to compliance with the mandatory requirements of that provision. In the present case, apart from the fact that the CIT did not exercise such power, it is plain from the admission of the Revenue in the counter affidavit that the AO was acting on the direction of the CIT. Hence reopening of assessment is not permissible.

Facts of the Case

The Assessee, a public limited company, was incorporated in 1985 as a joint venture between Showa Corporation, Japan and Hero Group, India. It is engaged, inter alia, in the business of manufacture and sale of shock absorbers for vehicles. For the previous year relevant to AY 2008-09, the Assessee filed a return of income at a total income of Rs. 25,10,74,700. The return was picked up for scrutiny. on 28th November 2011 the AO passed a draft assessment order. The objections thereto filed by the Petitioner were considered by the Dispute Resolution Panel. By an order dated 15th June 2012, the DRP directed the AO to pass the final assessment order by issuing certain directions. On that basis, on 6th July 2012, the AO framed the assessment of the Assessee by the final order of assessment under Section 143(3) read with Section 144C assessing the total income of the Assessee at Rs. 44,29,50,186 as against the returned income of Rs. 25,10,74,695.

Further on 11th March 2013, the DCIT issued a notice to the Assessee under Section 148 enclosing therewith the reasons proposed for reopening of the assessment for the aforementioned AY 2008-09. On 17th September 2013, the Petitioner filed its legal objections to the reopening of the assessment. On 19th February 2014, an order was passed by the DCIT dismissing the objections raised by the Petitioner to the reopening of the assessment under Section 148. The AO concluded in the ‘reasons for reopening the assessment’ that he had reasons to believe that a sum of Rs. 49,46,301+ Rs. 1,71,43,726 aggregating to Rs. 2,20,90,027 had escaped assessment and there was a failure on the part of the Assessee to disclose the true particulars of its income by claiming expenses which were not paid.

Contention of Appellant

The ld counsel of the appellant submitted that in the course of the assessment proceedings, the relevant queries regarding both the issues were raised by the Respondents.  Replies were filed by the Petitioner in response to such queries. It is only after an exhaustive verification of the information supplied that the Respondents passed the original assessment order dated 6th July 2012. It was pointed out that in respect to the issue of disallowance under Section 14A, the Respondents had even computed disallowance in terms of Rule 8D of the Rules. This disallowance was in fact challenged by the Petitioner before the Dispute Resolution Panel (‘DRP’) which confirmed the said disallowance. There was no new tangible material in the possession of the Respondents, which could have led to the formation of reasons to believe that income had escaped assessment. In fact, the reopening of the assessment was sought to be done only on the basis of change in opinion upon review of the existing material on record. Referring to the decision in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) and CIT v. Usha International Ltd (2012) 25 Taxmann.com 200 (Del) (FB), it was submitted that this was impermissible in law.

He further submitted that if CIT was of the view that the order of the AO was prejudicial to the interest of the Revenue, then it is possible to invoke the powers under Section 263 . Reliance was placed on the decisions in CIT v. DLF Power Ltd (2012) 17 taxmann.com 269(Del) and Lahmeyer Holding GMBH v. DDIT (2015) 376 ITR 70(Del). He further submitted that the ignorance of the AO could not be a ground for reopening the assessment. He submitted that notes to the accounts have to be read as part of the accounts which in turn were enclosed with the returns filed and therefore it could not be said that the material and true particulars were not disclosed by the Assessee. Reliance was placed on the decision in CIT v. Sain Processing and Wvg. Mills (P.) Ltd (2010) 325 ITR 565 (Del.). It was further submitted that the reasons for reopening the order had to be found in the order itself and cannot be supplied by an affidavit filed subsequently. Reliance was placed on the decisions in Sheth Brothers v. JCIT (2001) 251 ITR 270 (Guj) and Vijaykumar M. Hirakhanwala HUF v. ITO (2006) 287 ITR 443 (Bom.).

Contention of the Revenue

The ld counsel of the revenue submitted that it was only after the original assessment proceedings were concluded that the AO learnt that the expenditure was not on account of interest and that the financial charges in the period relevant to AY 2008-09 had increased to Rs. 2,27,24,801 as compared to the interest outgo of RS. 60,58,887 in the earlier AY 2007-08. This increased interest cost was mainly due to making of short term investment through funds borrowed from Nova Scotia Bank and Kotak Mahindra Bank for transactions of investment in mutual funds. According to Mr. Manchanda, this interest expenditure of Rs. 49,46,301 which is included in the total financial charges of RS. 2,27,24,801 had not been shown by the Assessee as being related to the investments either in the returns filed or even in the audited tax report. According to him, if it had been disclosed, the income expenditure of Rs. 49,46,301 would not have escaped assessment.

He further submitted that the Petitioner had surreptitiously claimed the said sum of Rs. 49,46,301 as business expenditure while it was a direct expense related to dividend and investments income from which it was either exempt or chargeable as short term capital gains. It is stated that the Assessee deliberately suppressed the material fact with a view to evade tax. Since the interest expenditure related to the investments was not discussed during the original assessment proceedings, the question of the AO changing his opinion on the same fact did not arise. He further submitted that any disclosure made in the financial accounts or any other document during the course of the assessment proceedings was not disclosure unless “it is appropriately mentioned at the appropriate place in the return of income”. Thus the Assessee had deliberately concealed and furnished inadequate particulars of income with a view to evade taxes.

He further submitted that the CIT did have power under Section 263, since the final assessment order was passed based on the order of  DRP, comprising of three senior CITs,  the “CIT-II i.e., one CIT cannot override the decision of 3 CITs”. It is further added that “the AO was left with no option but to take remedial action under Section 147/148.

Held by High Court

High Court held that admission of the revenue in counter affidavit, it is clear that the AO did not apply his mind independently and went by the order of the CIT. It is a settled law that a quasi-judicial authority cannot afford to act on the direction and in the present case on the direction of a superior officer. In Anirudhsinhji Jadega v. State of Gujarat (1995) 5 SCC 302, it was reiterated by the Supreme Court that once a discretion is vested with a certain authority, he alone should exercise that discretion vested under the statute and if he acts in accordance with “the direction or any compliance with some higher authorities instruction” it would be a case of failure to exercise discretion altogether. In Commissioner of Income Tax v. Greenworld Corporation (2009) 314 ITR 81 (SC) the AO issued an order under Section 148 of the Act on the dictates of the CIT. The Supreme Court held that without going into the question of the bona fides of the authorities under the Act, “the order of assessment passed by the Assessing Officer on the dictates of the higher authority, being wholly without jurisdiction, was a nullity”. Nothing prevented the CIT from exercising powers under Section 263 of the Act if it was felt that the order of the AO is prejudicial to the interest of the Revenue. With that remedy not being availed of by the Revenue, the reopening of the assessment on the basis of the same material would amount to a change of opinion. What was also overlooked was the fact of the pendency of the Assessee’s appeal before the ITAT on one of the issues that led to reopening of the assessment viz., the expenditure incurred for earning of exempt income under Section 14A.

A Full Bench of this Court in CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1(Del) held that an order purportedly passed without application of mind could not itself confer jurisdiction upon the AO to reopen the proceeding “without anything further” as that would amount to “giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong”. This was upheld by the Supreme Court in CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561(SC). Further In CIT v. Usha International Ltd [2012] 348 ITR 485(Del) a Full Bench of this Court observed that there could be instances where an AO may not have raise a query during the original assessment proceedings but may have examined the subject matter because the aspect or question may have been too apparent and obvious. In Swarovski India Pvt. Ltd. v. Deputy Commissioner of Income Tax 368 ITR 601 (Del), it was held that the escapement of income by itself is not sufficient for reopening the assessment in a case covered by the first proviso to Section 147 of the said Act and unless and until there was failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment, the power to reopen the assessment should not be invoked. It was insisted that the reasons for reopening of the assessment should specifically indicate which material fact was not disclosed by the Assessee in the course of the original assessment under Section 143(3) of the Act failing which there should not be any reopening of the assessment.

The Court finds that in the original assessment proceedings there was complete disclosure made by the Assessee of the relevant particulars. The Revenue has been unable to counter the assertion made by the Petitioner. Specific queries were raised by the AO during the course of the original assessment proceedings as regards the interest expenses. The AO rejected the contention of the Petitioner regarding low interest expense having been incurred and made a disallowance of Rs.59 which was questioned by the Assessee before the DRP unsuccessfully. Apart from stating that on review, the CIT found that there should have been a greater figure of disallowance, the Respondent did not point out what tangible materials had come to their possession in order to form reasons to believe that the income had escaped assessment on the above ground.

As pointed out by this Court in Lahmeyer Holding GMBH v. Deputy Director of Income Tax (2015) 376 ITR 70(Del), a distinction has been made as to the power to review and the power to re-assess. In the garb of reopening the assessment, the AO cannot be permitted to review the original assessment. That is in the domain of the CIT under Section 263 of the Act, subject of course, to compliance with the mandatory requirements of that provision. In the present case, apart from the fact that the CIT did not exercise such power, it is plain from the admission of the Revenue in the counter affidavit that the AO was acting on the direction of the CIT in terms of the instructions of the CBDT.

Accordingly, appeal of the assessee allowed.

CA Deepak Aggarwal