Kisan Proteins Pvt. Ltd. vs Asst Commissioner Income Tax

Mr. A.J. Shastri, J. - The petitioner by way of the present petition is challenging the legality and validity of the impugned notice dated 28.4.2010 under Section 148 of the Income Tax Act, 1961 (''the Act'' for short) and also an order dated 12.12.2011 by virtue of which the objections raised by the petitioner came to be rejected.

The brief facts are as under:

2.1 The petitioner is a company constituted under the provisions of the Indian Companies Act and is dealing in the manufacturing and trading activity of mustard oil and De-oiled cake (DOC). For the accounting year 2006-07, the assessee company has filed the return of income on 26.12.2006. Later on, the petitioner was served with a notice under Section 143(2) of the Act requiring the petitioner-company to submit certain particulars. In response to the said notice, the particulars came to be submitted by the petitioner-company and ultimately a scrutiny assessment came to be framed under Section 143(3) of the Act on 26.6.2008. During the process of assessment, all the relevant bills for construction of factory building were also produced, explained and only thereafter the assessment came to be finalized. It appears from the record that the authority has issued notice on 28.4.2010 under Section 148 read with Section 147 of the Act by virtue of which the authority has shown an inclination to reopen the assessment which has already been scrutinized. In response to the said notice having been issued upon the petitioner, the objections came to be filed under a communication dated 9.12.2011 and thereafter the said objections came to be finalized and rejected under an order dated 12.12.2011. While issuing notice for reopening, the reasons which have been recorded by the authority and came to be supplied to the petitioner which read as under:

"Reason to reopen the assessment under section 147 of the IT Act :

In this case assessment was completed u/s 143(3) of the Act on 26/06/2008 and loss was determined of Rs.20,04,645/- after making the addition of Rs.70,411/-. Subsequently, a reference was made to the District Valuation officer, I.T.D.Ahmedabad to ascertain the correct value of the investment made by the assessee company in the factory building as well as Plant & Machinery. The valuation officer, ITD, New Delhi vide his letter dated 31/12/2008 has given valuation report of plant & Machinery and the valuation officer- II,ITD, Ahmedabad vide his report No.2(1)/VOII/ 2009-10/838 dated 10/02/2010 reported the value of cost of construction in building. The same is reproduced as under:

Sr.No

Details of property

Value (F.Y.2005-06)

Declared by the assessee

Estimated by the V.O.

1 Building

84,57,956

2,64,91,000

2 Plant & Machinery

2,26,08,801

2,02,77,773

On going through the report it appears that the assessee company has understated the value of building to the extent of Rs.1,80,33,044/-. Thus the assessee had not fully disclosed investment made in building and had furnished the inaccurate particulars of incomes to the extent of Rs.1,80,33,044/-. Therefore, I have reason to believe that the income chargeable to tax have been escaped assessment for A.Y.2006-07 within the meaning of section 147 of the I.T.Act."

2.2 It is against this notice issued under Section 148 read with Section 147 of the Act and against an order of rejection of objections, the present petition came to be filed. It appears from the reasons which have been recorded that the authority has formulated an opinion about escapement of income on the basis of the valuation report prepared by the District Valuation Officer, ITD, Ahmedabad and on the basis of such report, the authority came to the conclusion that the assessee-company has underestimated the value of building to the extent of Rs.1.80 crores (rounded off) and thereby came to the conclusion that the assessee- company has not fully disclosed particulars about the investment made in the building and had furnished inaccurate particulars to the aforesaid extent and thereby the authority found that there is a reason to believe that income chargeable to tax has been escaped for the assessment year 2006-07. It is under this background the petitioner has brought the present petition before this Court.

The learned advocate Mr.Karia appearing on behalf of Mr.Patel learned advocate representing the petitioner has contended mainly that during the assessment proceedings, the petitioner has produced all the relevant details and material pertaining to the valuation of the building and there is no failure on the part of the petitioner to submit such particulars. It was also contended by learned counsel that the sole reliance which has been made by the Assessing Officer to reopen the assessment is a District Valuation Officer''s report and the said report cannot be relied upon without ascertaining or coming to the conclusion that the books of the petitioner assessee-company are not correct and without rejecting the same, reopening step cannot be taken. The learned counsel has further contended that there must be a live link between the formation of belief and the reasons which have been recorded. The material available on record has sufficiently been examined by the Assessing Officer before passing and framing the assessment order under Section 143(3) of the Act and therefore the counsel submitted that reopening under the circumstances may not be available to the authority. It was also contended that by virtue of exercising power for reopening under Section 148, the authority cannot review the earlier opinion which has already been formulated and substantiated under scrutiny assessment. It was pointed out that during the assessment proceedings, all the relevant bills pertaining to construction of factory building have been scrutinized as having been produced by the petitioner and after considering that only, the assessment proceedings have been finalized and therefore to allow the authority to reopen the assessment at this juncture would be based upon a mere change of opinion which is not permissible in view of settled position of law. Learned counsel for the petitioner has further contended that assessment proceedings have been finalized on 26.6.2008 whereas the District Valuation Officer''s report dated 18.8.2008 is made the subject matter of reopening of assessment after almost a period of 1 � months after finalization of assessment proceedings. Learned counsel submitted that this power of reopening is not permissible in view of Section 148 of the Act. Learned counsel for substantiating this contention has relied upon a decision of this Court passed in Tax Appeal No.148 of 2000 in case of GoodLuck Automobiles Pvt.Ltd. v. Asstt.C.I.T. reported in Taxman.com 264 and another decision in Tax Appeal No.293 of 2014 and allied matters decided on 15.4.2014 and relying upon these decisions the learned counsel submitted that without rejecting the books of accounts, this step of relying upon DVO''s report and thereby to reopen the assessment is impermissible. Learned counsel has further drawn the attention to another decision in case of Sargam Cinema reported at 328 ITR 513(SC), wherein also the similar view is expressed that DVO''s report cannot be formed the basis for reopening of assessment under Sections 147/148 of the Act. Learned counsel has further drawn the attention of the Court that even the report prepared by DVO which is as such based upon incorrect facts. Learned counsel specifically pointed out the infirmities which are crept in that report of DVO which is mentioned in page 9 of the compilation to which there is no counter by the authority. Counsel submitted that in the report prepared by DVO though there is no second floor still value is added as the building is having only ground and first floor. Even the open portion is also considered as if it is a fully constructed portion. The entire super structure for the expansion of plant and machinery etc have been also considered and inflated in the report prepared by DVO and therefore the same cannot be made the basis for reopening of the assessment. Learned counsel has drawn the attention of this Court to the communication dated 29.4.2008 in which the petitioner was asked to produce certain details and while referring to this communication the counsel has drawn the attention about Clause 7 which specifically deals with the particulars which were demanded with respect to the construction in question. This very query which has been put up has been explained by the petitioner under a communication dated 16.5.2008 and in the said communication which is reflected in page 33 of the compilation, clause 7 has been stated in detail along with all xerox bills pertaining to the said asset. The entire construction account has also been submitted. By drawing attention to this, learned counsel submitted that after thorough examination of all these details, the assessment proceedings have been finalized on 26.6.2008. Learned counsel has further drawn the attention that there is a specific reference to this very asset in the assessment proceedings and therefore the learned counsel submitted that when the entire issue has been thoroughly scrutinized and examined, to rely upon the report of the DVO for reopening of assessment which has already been finalized would be nothing but a mere change of opinion and therefore in view of settled position of law, the same is impermissible and therefore the learned counsel requested the Court to allow the petition.

To oppose this petition, learned counsel Mr.Nitin Mehta has submitted that impugned action is within a period of four years and therefore any information which is made available to the Assessing Officer can be gone into for the purpose of reopening of assessment. Learned counsel has submitted that the petitioner has mainly relied upon the decision of GoodLuck (supra) delivered by this Court wherein the learned counsel for revenue has submitted that the amended provisions of Section 142A was never before the Court for examination as the issue related to the said case was pertaining to assessment year 1989-90 and therefore the learned counsel submitted that new provision incorporated in the form of Section 142A is entitling the authority to reopen the assessment. It is submitted that under the new provision, there is no reference to rejection of books of accounts and therefore the learned counsel submitted that the ratio laid down by the two decisions which are relied on by the petitioner is of no avail and therefore the assessing authority has rightly issued the notice under Section 148 of the Act. Learned counsel for the revenue has further relied upon the decision of Delhi High Court in case of ACC Ltd. v. District Valuation Officer & Others, reported in (2012)79 DTR 365 and submitted that step of reopening of assessment is justified. While citing this judgment, the learned counsel has drawn the attention of this Court to the later portion of paragraphs 12 and 13 of the said decision and based upon this, learned counsel submitted to dismiss the petition. Learned counsel for the revenue has further relied upon the decision of the A.P. High Court in the case of Bharathi Cement Corporation P.Ltd. v. Commissioner of Income-Tax and others, reported in (2013)356 ITR 74 (AP) and contended that the report is rightly relied upon for the purpose of reopening of assessment and in the said decision, the counsel has drawn the attention to the observations made by the said High Court in paragraph 14 and ultimately submitted that since it is a case within a period of four years, no interference be made. Learned counsel has submitted that the valuation report is a sufficient information to be based upon by the authority to reopen the assessment and therefore since the cases which have been relied upon by the petitioners which are dealing with a different set of circumstances, the same may not be given weightage and thereby requested the court to dismiss the petition.

Having heard learned counsel appearing for the respective parties and having gone through the relevant record of the petition, the following facts are emerging:

(1) The reasons which have been recorded for reopening of the assessment are reflecting that the sole reliance is based upon the District Valuation Officer, ITD Ahmedabad and based upon this valuation report, the belief is formulated that the petitioner has understated the value of building to the extent as stated and thereby came to the conclusion that true facts have not been disclosed.

(2) In the context of reasons which are reflected, it appears that under a communication dated 29.4.2008 there is a specific query raised by the department asking and inquiring from the petitioner the details about the reference made in accounts along with the invoices, bills etc. pertaining to this very construction and it appears that under a communication dated 16.5.2008, the assessee company has sufficiently explained the same by producing all relevant xerox bills pertaining to the construction and it also appears from the record that entire construction account has been submitted before the Assessing officer who undertook the exercise of framing the assessment.

(3) It is also emerging from the record that the assessment order has been finalized under Section 143(3) on 26.6.2008 wherein also this issue related to construction has been dealt with and it is appearing from the record that this valuation report which is relied upon is after the assessment proceedings has been finalized.

(4) In view of the aforesaid position, it appears that the issue related to this construction has been gone into at sufficient length by the Assessing Officer before framing the assessment. However, even in addition to that, the proposition of law which has been propounded by this Court in case of Goodluck, it appears that without rejecting the books of accounts the reference could not have been made and Section 142A could not have been resorted to. In the said decision which has been delivered on 7.8.2012 reported in 26 Taxman.com 264, the Court has come to the conclusion that the conjoint reading of the statutory provisions contained under Section 69 read with Section 142A of the Act for the purpose of resorting to provision of Section 142A, there must be an opinion about the incorrect particulars in books of accounts and without rejecting the books of accounts, this reference cannot be resorted to under Section 142.

The relevant extract of the said judgment contained in paragraphs 9,10 and 11 are worth to be taken note of and reproduced hereinafter.

"9. On a conjoint reading of the provisions of section 69 and section 142A of the Act, it appears that for the purpose of resorting to the provisions of section 142A of the Act, the Assessing Officer would first be required to record a satisfaction that the assessee has made investments which are not recorded in the books of account. As a necessary corollary, he would then reject the books of account as not reflecting the correct position and then proceed to make the assessment on the basis of estimation, for which purpose he can resort to the provisions of section 142A of the Act and make a reference to the Valuation Officer for estimating the value of such investment. Thus, on a plain reading of section 142A of the Act, it is apparent that the question of estimating the value of any investment would arise only when the books of account are not reliable. Accordingly, the Assessing Officer would first be required to reject the books of account before making a reference to the Valuation Officer. The rejection of books of account should precede the reference to the Valuation Officer. As rightly contended by the learned counsel for the assessee, the report of the Valuation Officer cannot form the foundation for rejection of the books of account.

In the context of the controversy in issue it may also be germane to notice the provisions of section 145(2) of the Act as it stood at the relevant time, which provided that where the Assessing Officer is not satisfied with the correctness or completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided under section 144 of the Act. Therefore, when the Assessing Officer records that he is not satisfied about the correctness or completeness of the accounts of the assessee etc., the Assessing Officer can make a best judgment assessment. In other words, before proceeding to estimate the value of any investment the Assessing Officer has to record that he is not satisfied about the correctness or completeness of the accounts of the assessee.

At this juncture, reference may be made to the decision of the Uttarkhand High Court in Commissioner of Income-tax v. Bhawani Shankar Vyas, (2009) 311 ITR 8 wherein the court was dealing with the question as to whether the Income Tax Appellate Tribunal was justified in holding that without rejecting the books of account, the Assessing Officer was not justified in making reference to the Departmental Valuation Officer, ignoring the retrospective effect of the provisions of section 142A of the Income Tax Act? The court held that where the Income Tax officer while making his assessment had doubts on the correctness of the accounts submitted by the assessee, the Income Tax Officer was perfectly justified in making a reference to a departmental valuer without formally or categorically rejecting the books of account submitted by the assessee. According to the High Court, this view was further strengthened by section 142A of the Act. The court accordingly held that the Income Tax Appellate Tribunal was not justified in holding that without rejecting the books of account, the Assessing Officer was not justified in making reference to the Departmental Valuation Officer. The said decision came to be carried before the Supreme Court in the case of Sargam Cinema v.Commissioner of Income-tax (supra) wherein the court found that the Tribunal had decided the matter rightly in favour of the assessee inasmuch as the Tribunal came to the conclusion that the assessing authority could not have referred the matter to the Departmental Valuation Officer (DVO) without the books of account being rejected. It was observed that the Tribunal had recorded a categorical finding that the books were never rejected, which aspect had not been considered by the High Court. The court, accordingly, set aside the order of the High Court and restored the order of the Tribunal."

It appears that while coming to such conclusion, the Court has also relied upon the decision of the Hon''ble Apex Court reported in the case of Sargam Cinema v. Commissioner of Income-Tax, reported in (2010)328 ITR 513 (SC) and after considering the ratio, the Court has propounded like this. Similarly in the case of tax appeal which came to be decided on 15.4.2014 in case of Vijaykumar D Gupta wherein also it has been propounded that Assessing Officer has made reference to the DVO without rejecting the books of accounts and thereby considering the decision in case of Sargam Cinema (supra) delivered by the Apex Court and also the decision of Goodluck Automobiles (supra) reported in 359 ITR 306, the Court came to the conclusion that Section 142A cannot be resorted to. Even apart from this, during the assessment proceedings also, this Hon''ble Court has found that Section 142A can be resorted in a particular set of circumstances and therefore it appears that even during the assessment proceedings also, reference cannot be made in a particular manner under Section 142A, certainly the same cannot be resorted to after assessment proceedings having been over and therefore it appears to this Court that the plea raised by the petitioner is squarely covered by the aforesaid two decisions relied upon by him and therefore if the step of reopening of assessment is allowed, the same would tantamount to be based upon a mere change of opinion which in settled legal position is impermissible.

It is found from the record that the assessee-company has produced the entire construction along with the bills in detail and only after examining the same, the assessment order has been finalized and therefore a mere report of valuation cannot be construed as sufficient and tangible material which may permit the authority to reopen the assessment. In addition thereto, it appears that the Assessing Officer is satisfied with the correctness and complete notes of accounts of the assessee and nowhere even the method of accounting has been questioned and therefore when the entire construction account is made available to the Assessing Officer and only thereafter when the final assessment has taken place, DVO''s report cannot be construed as tangible material which would warrant the authority to exercise the powers of reopening of assessment. The Apex Court time and again has propounded that the powers of reassessment cannot be exercised just to reensure the correctness of material which has already been examined. Further, not to review the opinion which has already been formulated and in large number of cases it has been propounded that reopening of assessment cannot be based upon mere change of opinion. One such decision which is reported in case of CIT v. Kelvinator of India Ltd. reported in (2010)320 ITR 561 The said decision has analysed the concept of change of opinion and relevant extract deserves to be reproduced hereinafter:

"The concept of "change of opinion" on the part of the Assessing Officer to reopen an assessment does not stand obliterated after the substitution of section 147 of the Income-Tax Act, 1961, by the Direct Tax Laws (Amendment) Acts, 1987 and 1989. After the amendment, the Assessing Officer has to have reason to believe that income has escaped assessment, but this does not imply that the Assessment Officer can reopen an assessment on mere change of opinion. The concept of "change of opinion" must be treated as an inbuilt test to check the abuse of power. Hence after April 1, 1989, the Assessing Officer has power to reopen an assessment, provided there is "tangible material" to come to the conclusion that there was escapement of income from assessment. Reason must have a link with the formation of the belief."

Coming back to the plea raised by the counsel for the revenue that Section 142A came to be introduced at a later point of time and the cases which have been cited above were in the context of earlier provision and in the preamended Section 142A had no element of rejection of books and therefore since in view of this change of statutory provision, the ratio laid by the aforesaid two decisions referred to above are not applicable. In fact, on going through the two decisions it is found by this Court that the Court in case of Goodluck has dealt with the effect that both the provisions contained under Section 69 as well as Section 142A of the Act and on analysis of the said two statutory provisions, has propounded that the assessing officer would first be required to record a satisfaction that the assessee had made an investment which are not recorded in the books of accounts. As a necessary corollary, he would then reject the books of accounts as not reflecting the correct position and then to proceed to make assessment on the basis of assessment for which purpose he can refer to provision of Section 142A of the Act and therefore the basic element of formation of belief about incorrect information which are not reflected in the books of accounts which is a condition precedent before referring to Section 142A of the Act. The words of both the provisions `pre'' as well as `post'' are not of much difference and therefore the contention raised by the revenue is meritless and therefore the same is not accepted. A further reference is made by the learned counsel for the revenue to the case of decision reported in 356 ITR 74 delivered by the A.P.High Court in the case of Bharathi Cement Corporation P.Ltd. (supra), wherein the learned counsel has relied upon the observations contained in paragraph 14 in it. The said decision is based upon a different set of circumstances which is not appearing on the case on hand and the Court has found that ratio laid down by this Court in case of Goodluck reported in 26 Taxman.com 264 has got the applicability to the facts of the present case, the contention raised by the revenue is not accepted.

In over all view of the aforesaid facts and circumstances, it appears to the Court that the particulars which have been asked for have been sufficiently explained during the assessment proceedings and the assessment proceedings have become final and therefore relying upon solitary report, the only reason which is based upon to exercise powers for reopening of the assessment would be nothing but change of opinion which is not permissible. Therefore the over all circumstances reflected on the record indicates that the action on the part of the respondent authority under reopening of the assessment is impermissible and therefore the petition deserves to be allowed and the impugned notice issued in Section 148 dated 28.4.2010 as well as the order of rejection of objection dated 12.12.2011 are quashed and set aside hereby. Rule is made absolute.