Commissioner of Income Tax vs Raj Finlease Ltd.

K. Raviraja Pandian, J.—By formulating the following question of law, the Revenue has come forward with the above appeals as against the

order of the Tribunal dt. 13th July, 2007 passed in ITA Nos. 990 and 789/Mad/2003:

Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessment was not validly reopened and

accordingly annulled the reassessment order, even though income chargeable to tax has escaped by virtue of claiming excess depreciation and the

Tribunal has not adjudicated the other issues raised by the assessee is valid?

The facts culled out from the records proceed as follows:

The relevant assessment year is 1998-99. The assessee company filed a return of income for the said assessment year declaring a net income of

Rs. 1,54,640 on 30th Nov., 1998. The assessment was completed u/s 143(3) of the IT Act. Later on, the AO, taking a view that there was an

escapement of income, issued a notice u/s 148 of the IT Act on 14th March, 2001 calling upon the assessee to file a return of income for the said

assessment year. The reason sought for by the assessee for the reopening has not been furnished. However the assessee, by his letter dt. 24th

Feb., 2002, informed the AO that the return filed by him originally could be treated as the return filed in response to the notice u/s 148 of the Act.

The AO reopened and framed the assessment on the premise that the assessee has withdrawn the claim for depreciation on plant and machinery

leased out in the asst. yrs. 1996-97 and 1997-98, however, failed to file a revised return withdrawing the depreciation as in the earlier years. Thus,

the reopening was based on the ground that there was excess claim of depreciation of Rs. 16,74,008 which escaped assessment. As against that

order, the assessee preferred an appeal before the CIT(A) who, by observing that the assessee himself having requested to treat his return filed

earlier on 31st March, 1999 as the return filed in response to the notice u/s 148 of the Act, cannot reagitate now by saying that the AO has no

reason to reopen the assessment. The said order was carried on appeal to the Tribunal by the assessee. Before the CIT(A) as well as before the

Tribunal the assessee relied on the reasoning he obtained from the AO for reopening of assessment, by filing an application under the Right to

Information Act. On the basis of that information so furnished, the Tribunal has come to the conclusion that when the AO decided to reopen the

assessment, the only item which has escaped assessment was claim of depreciation in excess of what was eligible to the assessee. But this reason

did not really exist, as the assessee had filed a revised return within the time allowed u/s 139(5) of the Act on 31st March, 1999 and this fact of

filing of revised return has been ignored by the assessing authority.

It is relevant to state here that while making the reassessment, the AO has made certain other additions also. Learned Counsel for the Revenue

assailed the order of the Tribunal on the ground that the filing of the revised return for the asst. yr. 1998-99 is a consequence of wrong claim of

depreciation made for the asst. yr. 1996-97. That return cannot be treated as valid return. The Tribunal, while allowing the appeal, has not

considered whether the other additions made by the AO are valid or not and totally annulled the reassessment.

Heard the learned Counsel for the Revenue and perused the materials available on record.

The reasoning for invoking the provisions of Section 147 of the Act, i.e., for issuance of notice u/s 148 of the Act for reassessment furnished to

the assessee, is as follows:

The assessee has withdrawn their claim for 100 per cent depreciation on plant and machinery leased out in the asst. yrs. 1996-97 and 1997-98. In

line with the same the assessee has not filed any revised return withdrawing the depreciation as in earlier years. The assessee has claimed

depreciation at Rs. 16,74,408. As income chargeable to tax has escaped assessment by virtue of claiming depreciation in excess of what is eligible,

the assessment finalized has to be reopened u/s 147 of the Act. I have reason to believe that income chargeable to tax has escaped assessment and

I propose to reopen the assessment u/s 147 of the IT Act.

From the above reasoning, it could be seen that the AO was of the view that for the assessment year under consideration the depreciation was

not withdrawn and that is the reason for reopening the assessment. The AO, in addition to the adding of depreciation, made certain other additions

also on account of loss incurred by the assessee on the sale of repossessed vehicle and some trade creditors.

Section 147 of the Act which provides that for any escapement of assessment, the assessment can be reopened only in cases where the AO has

reason to believe that income chargeable to tax has escaped assessment. The belief must be based on some prima facie materials. See Raymond

Woollen Mills Ltd. Vs. Income Tax Officer and Others, .

The Tribunal, the ultimate fact finding authority, has concluded that ten the date when the AO decided to reopen the assessment, he had reason

to believe that the escapement of assessment of income was with regard to claim of depreciation in excess of what was eligible to assessee. That

reason was not in existence when the AO initiated reopening proceedings u/s 147 of the Act because of the reason that the assessee had already

filed a revised return within the time allowed u/s 139(5) of the Act on 31st March, 1999 vide acknowledgement No. 01193. Had this factor been

considered by the AO, then there was no reason available to him for reopening the assessment. He could not have had any jurisdiction to reopen

the assessment, in the absence of any reason to believe that some item of income has escaped taxation. The Tribunal further observed that once the

assessment is validly reopened, the other additions could also be made legally, but the action of reopening has to take precedence for framing the

assessment. Unless and until the assessment is validly reopened, no addition can be made whether on the item based on which reopening was

made or on other items and ultimately held that in the absence of valid and proper initiation of reopening proceedings u/s 147 of the Act,

reassessment could not be made.

We are in complete agreement with the reasoning given by the Tribunal, which is the stated and well established legal principle pertaining to

reopening of assessment u/s 147 of the Act. When the reasoning given for reopening of assessment is not available at the time of initiation of

reopening, the reopening could only be regarded as not in accordance with law and invalid.

For the reasons stated above, the appeal deserves to be dismissed and it is accordingly dismissed. Miscellaneous petition is closed.