Commissioner of Income Tax vs Ankit C. Maheshwari

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Mukesh 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 September 16, 2013, passed in I.T.A. No. 742/Ahd/2013 for the assessment year 2005-06, the Revenue has preferred the present tax appeal with the following proposed substantial questions of law:

"(A) Whether, on the facts and in the circumstances of the case and in law, the Hon''ble Income-tax Appellate Tribunal 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 to section 147 of the Act is squarely applicable?

(B) Whether, on the facts and in the circumstances of the case and in law, the Hon''ble Income-tax Appellate Tribunal was justified in holding that the 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?"

The facts leading to the filing of the present appeal, in a nut-shell, are as under;

That the assessee filed its return of his income under section 143(3) of the Income-tax Act (hereinafter referred to as "the Act"). That the regular assessment under section 143(3) of the Act was completed on December 26, 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 January 23, 2008, disallowing the interest on unsecured loans to the extent of Rs. 5,86,907. That the matter travelled 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 Assessing Officer reopened the case under section 147 of the Act and issued a notice under section 148 of the Act on March 23, 2011, after recording the reasons, as noted hereinbelow.

"1. The assessee has filed its return of income on October 30, 2005, declaring a total income at Rs. 55,36,835 and the same was processed under section 143(1) of the Act on December 26, 2005, and the return income of the assessee was accepted as it is. This case was selected for scrutiny and assessment proceedings under section 143(3) of the Income-tax Act, 1961, were completed on December 26, 2007, determining a 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. 79,358 out of disallowance of administrative expenses. Further, in this case rectification order under section 154 of the Act was passed on January 23, 2008, and thereby disallowance of interest on the unsecured loans of Rs. 5,86,907 was made and total income of the assessee was determining at Rs. 95,93,367.

Perusal of the assessment records revealed that the assessee made huge payment of interest during the financial year relevant to the assessment year under consideration amounting to Rs. 57.06 lakhs 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 lakhs mentioned in schedule 10 and schedule 7 appended to the balance sheet as under:

However, no interest/returns has been reflected as received in the profit and loss account. On loan obtained, therefore, required to be disallowed and added back to the total income in view of the provisions 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 lakhs with the tax effect of Rs. 2.92 lakhs including interest and penalty of Rs. 2.63 lakhs.

As seen from the records the assessee paid rent to the tune of Rs. 10.68 lakhs and debited to the profit and loss account. However, the tax required to be deducted at source as per the provisions of section 194-I was not deducted and paid into the Government account. Tax was deducted and paid to the extent of Rs. 7.03 lakhs on payment of commission and interest as show at serial No. 27 of Form 3CD. The liability on this account was also not reflected in the balance-sheet it proves that no tax was deducted at source from the payment of rent. This resulted into non-deduction of tax at source of Rs. 1.82 lakhs including interest and penalty of Rs. 1.60 lakhs.

In view of the above facts, I am satisfied that there is certainly underassessment of income and escaped assessment of income within the provisions of section 147 of the Income-tax Act, 1961, and this is fit for reopening."

That the assessee appeared before the Assessing Officer in the reassessment proceedings and furnished the necessary details. That, thereafter, the Assessing Officer passed the reassessment 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.

That feeling aggrieved and dissatisfied with the reassessment order passed by the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) and by the order dated December 24, 2012, the learned Commissioner of Income-tax (Appeals) allowed the said appeal and quashed and set aside the reassessment order by observing that all the conditions which are required to be fulfilled while carrying out reassessment under section 147 of the Act were not complied with. The learned Commissioner of Income-tax (Appeals) also observed that the initiation of the reassessment proceedings were after four years. The learned Commissioner of Income-tax (Appeals) observed as under in paragraphs 2 and 3:

"2.3 I have considered the facts of the case, the basis of reopening and the submissions of the appellant. As it may be seen from the reasons recorded by the Assessing Officer, 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 under section 148 of the Income-tax Act. However, the action of the Assessing Officer of reopening of assessment on the basis of the above grounds is not justifiable. To start proceedings under section 147 of Income-tax Act, the Assessing Officer 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, the Assessing Officer has no new material to form the opinion that there is escapement of income by the 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 the books of account were verified by the Assessing Officer during the regular assessment proceedings and additions were also made. On account of interest on loans, rectification order under section 154 was also passed after the completion of regular assessment. But, all these additions were deleted by the appellate authorities. Not being able to tax the additional income, now the Assessing Officer has taken the recourse of reassessment proceedings by issuing notice under section 148 of the Income-tax Act on the basis of the facts already available with AOI during the regular assessment proceedings. In such situation, taking action under section 147 of Income-tax Act on the basis of change of opinion cannot be allowed. As it was held in the case Commissioner of Income Tax, Gujarat Vs. Bhanji Lavji, Porbandar, by the Hon''ble Supreme Court that when the primary facts necessary for assessment are fully and truly disclosed, the Income-tax Officer 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 Income Tax Officer, Income Tax-cum-Wealth Tax Circle II, Hyderabad Vs. Nawab Mir Barkat Ali Khan Bahadur, Hyderabad, , the 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 under section 147 of Income-tax Act. However, from the facts of this case, it can be seen that the Assessing Officer 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 the appellant. For a long time the facts of the case remained accepted by the Assessing Officer and suddenly after almost five years, the Assessing Officer changes his opinion that the interest and rental expenses are not allowable. Such change of opinion cannot be held valid in the light of the aforesaid decision of the Hon''ble Supreme Court. Moreover, since the notice under section 148 has been issued beyond four years from the end of the relevant assessment year, the Assessing Officer ought to have fulfilled the condition as per the 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, the Assessing Officer himself has stated in paragraph 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 the appellant. Thus, the Assessing Officer 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, the reopening of assessment cannot be held legal, therefore, the whole reassessment proceedings stand annulled."

Feeling aggrieved and dissatisfied with the order passed by the Commissioner of Income-tax (Appeals) in allowing the appeal and in setting aside the reassessment order, the Revenue preferred the appeal before the learned Income-tax Appellate Tribunal. The learned Tribunal dismissed the appeal and confirmed the order passed by the Commissioner of Income-tax (Appeals) by observing as under at paragraphs 3 and 4:

"3. We have considered the rival submissions. We find that the assessment was annulled by the learned Commissioner of Income-tax (Appeals) on this basis that as per the reasons recorded by the Assessing Officer for reopening the assessment under section 148 of the Income-tax Act, 1961, this is not the allegation of the Assessing Officer 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 Assessing Officer under section 143(3) of the Act and the reopening 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 Assessing Officer in the assessment order that the original assessment was completed under section 143(3) of the Act on December 26, 2007, and he has also noted that notice under section 148 of the Act was issued to the assessee and served upon him on March 23, 2011. The assessment year involved is the assessment year 2005-06 and, hence, the reopening of the assessment is after four years and, therefore, the first proviso to section 147 of the Act is applicable. By this proviso, the reopening 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 September 10, 2013, and the hearing was fixed on September 12, 2013, we do not consider any other document in the paper book except the reasons for reopening of the assessment available on pages 8 and 9 of the paper book because the same are available in the assessment records also. As per the reasons recorded by the Assessing Officer for reopening of the assessment, it is seen that it is noted by the Assessing Officer 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 the first proviso to section 147 are not being complied with and, therefore, the reopening after four years is not valid. Therefore, we uphold the findings of the learned Commissioner of Income-tax (Appeals) regarding the annulment of the assessment.

Since the assessment itself is annulled by the learned Commissioner of Income-tax (Appeals) and his order on this aspect has been upheld by us in the 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."

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

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.

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 Commissioner of Income-tax (Appeals) and the learned Income-tax Appellate Tribunal. We have also gone through the reasons recorded by the Assessing Officer for reopening the assessment under section 148 of the Act, which are reproduced hereinabove. Considering the above, it is required to be noted that, as such, in the reasons recorded by the Assessing Officer for reopening the assessment under section 148 of the Act, it was not the contention of the Assessing Officer that there was any failure on the part of the assessee 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 the 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 Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal 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 the Assessing Officer to reopen the assessment under section 148 of the Act. Even in the reasons recorded by the Assessing Officer, 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 Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal in holding that the reassessment proceedings were bad in law. In view of the above, we see no reason to interfere with the impugned order passed by the learned Commissioner of Income-tax (Appeals), dismissing the appeal, and as confirmed by the order of the Income-tax Appellate Tribunal and no substantial question of law arise. The present appeal deserves to be dismissed and is dismissed, accordingly.