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  • J.P Devadhar, JJ.
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Bench: Dr. D.Y. Chandrachud, J. — Summary of Opinion

Factual and Procedural Background

The proceedings arise from a notice dated March 18, 2009 issued by the first respondent (Assessing Officer) seeking reopening of the assessment for the assessment year 2002-03 under section 147 of the Income-tax Act, 1961. The notice was issued beyond the four-year period from the end of the relevant assessment year.

The assessee filed its return of income for AY 2002-03 on October 30, 2002, declaring a loss of Rs. 46.96 lakhs and computing tax under section 115JB at Rs. 1.94 crores. An assessment under section 143(3) was completed on March 7, 2005. The reopening notice (under section 148) alleged escapement of income totaling Rs. 22.22 crores on four specific grounds (set out in the notice).

The assessee furnished objections to the reopening. An assessment order was passed on November 30, 2009 without disposing of those objections. The assessee approached this Court under article 226 of the Constitution. By order dated March 10, 2010, a Division Bench set aside the reassessment order and directed the Assessing Officer to pass an order on the assessee's objections, referring to the Supreme Court's decision in GKN Driveshafts. On remand the Assessing Officer again did not deal with the merits of the objections, treating those matters as to be decided at the stage of assessment. The present opinion considers the validity of the reopening notice and the four grounds relied upon by the Assessing Officer, and finally allows the petition and sets aside the reopening notice dated March 18, 2009.

Legal Issues Presented

  1. Whether the reopening of an assessment under section 147, issued beyond four years from the end of the relevant assessment year, is valid in the absence of a failure by the assessee to "disclose fully and truly all material facts" necessary for assessment (first proviso to section 147).
  2. What is the scope and effect of Explanation 1 to section 147, i.e., whether mere production of account books or other evidence during assessment proceedings necessarily amounts to a disclosure within the meaning of the proviso.
  3. Whether a reopening based solely on material already on the assessment record (and which the assessee had specifically disclosed during assessment proceedings) can be sustained.
  4. Whether the Assessing Officer complied with the judicial requirement (as explained in GKN Driveshafts) to deal with the assessee's objections before passing an assessment order, and the consequences of failing to do so.

Arguments of the Parties

Appellant (Assessee) — Main Arguments

  • There was full and true disclosure by the assessee of all material facts necessary for the assessment for AY 2002-03; the reopening notice is beyond four years and therefore requires satisfaction of the proviso to section 147, which is not met.
  • Each of the four reasons relied upon by the Assessing Officer for reopening was founded on information already disclosed to the Assessing Officer during the assessment proceedings; hence there was no failure to disclose.
  • Because the reasons for reopening were based on assessment records and previous disclosures, the statutory condition precedent for reopening beyond four years is absent and the exercise of writ jurisdiction under article 226 is warranted.

Respondent (Revenue) — Main Arguments

  • Except for the first issue, the other three issues were not considered by the Assessing Officer during original assessment, and therefore Explanation 1 to section 147 may apply to deny that the assessee's production of records amounted to a full disclosure.
  • Explanation 1 to section 147 provides that mere production of account books or other evidence from which material evidence could, with due diligence, have been discovered, will not necessarily amount to disclosure within the meaning of the proviso.
  • The proviso would apply in the present case because, according to Revenue, the Assessing Officer had not considered three of the issues on the basis on which the assessment was sought to be reopened.
  • At the hearing, Revenue also urged an argument regarding the manner in which the loss on sale of investments was reflected in the statement of total income (suggesting a lack of clarity), but the Court noted this ground was not relied upon in the reasons for reopening or in the order dealing with objections.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
GKN Driveshafts (India) Ltd. v. ITO, [2003] 259 ITR 19 (Supreme Court) Requirement that an Assessing Officer must consider and deal with objections raised by the assessee before passing an order of assessment (procedure to be followed). The Division Bench had earlier set aside the reassessment order for failure to deal with objections in accordance with GKN. The Court relied on that principle to fault the Assessing Officer for again failing to deal with objections on remand.
Imperial Chemical Industries Ltd. v. ITO, [1978] 111 ITR 614 (Calcutta High Court) Interpretation of the words "not necessarily" in Explanation 1 to section 147: whether production of documents amounts to disclosure depends on facts and circumstances, including the nature of the document and the circumstances of production. The Court cited this authority to support the proposition that production of records does not inevitably amount to disclosure; the question depends on the document and context.
Rakesh Agarwal v. Asst. CIT, [1996] 221 ITR 492 (Delhi High Court) The nature of documents and circumstances of production determine whether material is effectively disclosed or is embedded in voluminous records requiring careful scrutiny (and so may attract Explanation 1). The Court relied on this reasoning to explain the proper scope of Explanation 1 and to examine whether the assessee's disclosures were meaningful and specific.
Cartini India Ltd. v. Addl. CIT, [2009] 314 ITR 275 (Bombay High Court) Where the Assessing Officer, upon consideration of material on record, has conclusively taken a view in assessment, it is impermissible to reopen the assessment on the same material to take a different view. The Court applied this principle to the first ground of reopening, holding that the Assessing Officer could not reopen the assessment on the same assessment record and disclosures to adopt a different view.

Court's Reasoning and Analysis

The Court began by identifying the statutory framework: section 147 authorizes reassessment where the Assessing Officer has reason to believe income has escaped assessment. Where reopening is beyond four years from the end of the relevant assessment year and an assessment under section 143(3) has been carried out, the proviso to section 147 bars reopening unless escapement of income is by, inter alia, failure by the assessee to "disclose fully and truly all material facts" necessary for assessment. Thus the threshold question is the nature and quality of the disclosure made by the assessee.

The Court examined Explanation 1 to section 147 and explained its operation: production of account books or other evidence before the Assessing Officer will not "necessarily" amount to disclosure. The word "necessarily" was interpreted (with citation to authorities) to mean that whether production equals disclosure depends on inevitable inference from facts — i.e., the nature of the documents and circumstances of production determine whether a full and true disclosure was made or whether the material was only discoverable by further scrutiny.

The Court then analyzed each of the four grounds relied upon by the Assessing Officer.

Ground 1 — Market development and support expenses (Rs. 21.85 crores)

The assessee's accounts and notes (schedules and significant accounting policies) disclosed that Rs. 21.85 crores was paid to a wholly owned subsidiary and treated as deferred revenue expenditure, with Rs. 9.36 crores amortized and Rs. 12.84 crores carried forward. The Assessing Officer had specifically queried this treatment in a December 3, 2004 communication and the assessee responded on February 7, 2005 with a detailed note and authorities. The assessment order was passed after that response.

The Court found that the reopening notice on this ground was founded entirely on assessment records and the disclosure made during assessment. Applying Cartini, the Court held that where an Assessing Officer has conclusively considered and taken a view based on material on record, he cannot reopen the assessment on the very same material to take another view. Consequently the condition precedent for reopening beyond four years (failure to disclose fully and truly all material facts) was not satisfied on this ground.

Ground 2 — Loss on sale of long-term investments (net issue alleged Rs. 60 lakhs)

The assessee's schedules disclosed a loss on sale of long-term investments of Rs. 2.04 million and a profit on sale of current investments of Rs. 0.18 million; the statement of total income included a net addition of Rs. 1.85 million. Revenue, at hearing, sought to raise an issue about how the loss was accounted for, but the Court emphasized that the validity of reopening must be judged by the reasons that weighed with the Assessing Officer when issuing the reopening notice. The Court observed that neither the reopening notice nor the subsequent order dealing with objections referred to the ground advanced by Revenue at the hearing; such a ground could not be raised for the first time before the Court in proceedings under article 226. Thus the Court would not sustain reopening on that newly-argued premise.

Ground 3 — Prior period expenses debited (Rs. 31.32 lakhs)

The assessee's returns contained notes (including reliance on the Guidance Note on Tax Audit under section 44AB of the Act) explaining the nature of prior period items and clarifying that certain crystallized liabilities were not treated as prior period items. The assessee had furnished the tax audit report as mandated under section 44AB along with its return. The Court held that these disclosures made as part of the tax audit report could not be considered mere production of books that would attract Explanation 1; rather they were specific disclosures satisfying the assessee's obligation to disclose fully and truly all material facts.

Ground 4 — Interest on a fixed loan (Rs. 12.68 crores debited; Rs. 2.18 crores capitalized earlier)

The assessee disclosed earnings before interest and tax, and separately the interest charged (Rs. 12.68 crores) and amortization of premium on debentures. The accounting policy for borrowing costs was disclosed in schedule 14, and the assessee contended that interest of Rs. 12.68 crores related to normal business borrowings and was deductible under section 36(1)(iii). The Notice's reference to Rs. 2.18 crores capitalized in an earlier year was explained by the assessee. The Court found that the Assessing Officer did not deal with this explanation while disposing of objections, and therefore Revenue had not shown a failure by the assessee to disclose fully and truly all material facts on this ground.

After addressing each ground, the Court concluded that Revenue failed to establish that the assessee had failed to disclose fully and truly all material facts necessary for the assessment year 2002-03, and therefore the statutory condition precedent for reopening beyond four years was not met. The Court also reiterated the requirement (from GKN) that objections must be considered and dealt with by the Assessing Officer; the Assessing Officer's failure to do so on remand was relevant to the Court's review.

Holding and Implications

HOLDING: The petition is allowed and the rule is made absolute in terms of the prayer clause (a); the notice dated March 18, 2009 for reopening the assessment under section 147 is set aside. There shall be no order as to costs.

Implications:

  • Direct effect on parties: The reopening notice dated March 18, 2009 is quashed and the Assessing Officer is prevented from proceeding on the basis of that notice; the assessee's position for AY 2002-03 is protected to the extent indicated by the Court's ruling.
  • Statutory guidance reaffirmed: The decision restates the statutory test in the proviso to section 147 — that reopening beyond four years can only be sustained if the assessee failed to disclose fully and truly all material facts. It also clarifies the scope of Explanation 1: mere production of documents does not automatically relieve an assessee of the duty to make specific disclosures, but disclosures in mandated audit reports and specific responses to AO queries can constitute full and true disclosure.
  • No broader precedent was announced beyond the application of existing principles and authorities referenced in the opinion; the Court applied established precedents (GKN, Cartini, Imperial Chemical Industries, Rakesh Agarwal) to the facts before it.

This summary is based exclusively on the contents of the provided opinion and does not add or infer information not present in the original text.

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    3I Infotech Ltd. v. Assistant Commissioner Of Income-Tax And Others

    Dr. D.Y Chandrachud, J.:— Rule. With the consent of counsel, rule is made returnable forthwith. By the consent of counsel for both the parties, the petition is taken up for hearing and final disposal.

    2. The dispute in these proceedings arises out of a notice issued by the first respondent on March 18, 2009, by which an assessment for the assessment year 2002-03 is sought to be reopened in pursuance of the provisions of section 147 of the Income-tax Act, 1961. The notice for reopening the assessment is beyond a period of four years from the end of the relevant assessment year. The assessee filed a return of income for assessment year 2002-03 on October 30, 2002, declaring a loss of Rs. 46.96 lakhs and computed tax under section 115JB of Rs. 1.94 crores. An order of assessment was passed on March 7, 2005, under section 143(3). On March 18, 2009, the Assessing Officer issued a notice under section 148. The reasons on the basis of which the assessment is sought to be reopened are stated in the notice and are as follows:

    “The assessee has filed its original return of income on October 31, 2002. Assessment under section 143(3) was completed on March 7, 2005 computing income at Rs. 9,79,34,208.

    It is seen from the assessment records that as per clause 2.18 of Notes of Accounts the company has engaged ICICI Infotech Inc. USA, the wholly owned subsidiary for providing market development and sales support in the US for project software and implementation services for onsight projects effective July 1, 2001. As per the arrangement, the company remunerates Infotech Inc. on a cost plus basis for the aforesaid services and all the project revenues accrue to the company. Out of such remuneration, amount payable towards market development and support expenses of Rs. 218.54 million has been treated as deferred over a period of two years as in the opinion of the management benefit of such expenses would accrue in future also. The company has amortized Rs. 9,36,63,726 out of the said amount of Rs. 21,85,48,694 in the accounts and also claim deduction of Rs. 21,85,48,694 in computation of income while adding back the amortized amount. However, the said expenditure should have been treated as capital expenditure and the assessee has wrongly claimed the deduction towards such expenses.

    Thus, there is an escapement of income to this extent of Rs. 21.85 crore.

    2. Further, it is also seen that the assessee has arrived at loss on sale of long-term investment amounts to Rs. 2.4 million whereas the amount added back to the income is only Rs. 1.85 million.

    Thus, there is an escapement of income to this extent of Rs. 60 lakhs.

    3. It is seen from annexure 8 to clauses 20 and 22(b) of Form 3CD that an amount of Rs. 31,32,627 has been debited to the profit and loss account on account of prior period expenses which are not allowable as per the provisions of the Income-tax Act. The same should have been added back.

    Thus, there is an escapement of income to this extent of Rs. 31.32 lakhs.

    4. The assessee has debited Rs. 126.80 million on account of interest on fixed loan to the profit and loss account which has not been capitalized. The company has capitalized Rs. 21.89 million in previous year 2000-01 on the same account.

    Thus, there is an escapement of income to this extent. Thus, there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for the said assessment year. I have reasons to believe that the income to the extent of Rs. 22.22 crores has been escaped the assessment.”

    3. The petitioner furnished its objections to the reopening of the assessment. An order of assessment was passed on November 30, 2009, without disposing of the objections. In a petition instituted before this court under article 226 of the Constitution, a Division Bench by its order dated March 10, 2010, observed that in failing to deal with the objections of the assessee, the Assessing Officer had not complied with the directions of the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO, [2003] 259 ITR 19. While setting aside the order of reassessment, this court directed the Assessing Officer to pass an order on the objections of the assessee. On remand, the Assessing Officer has not dealt with the merits of the objections holding that it is at the stage of assessment that he would be dealing with these objections.

    4. In assailing the exercise of the jurisdiction under section 147, the learned counsel appearing on behalf of the assessee submitted that: (i) There was a full disclosure by the assessee of all the material facts necessary for the assessment. The reopening of the assessment is after four years of the end of the relevant assessment year. There was no failure to disclose fully and truly all the material facts necessary for the assessment. Hence, the condition precedent to the exercise of the jurisdiction to reopen the assessment beyond four years has not been fulfilled; (iii) Four reasons have weighed with the Assessing Officer in reopening the assessment. On each of the four issues, there was a full and true disclosure of all the material facts by the assessee for the assessment. As a matter of fact, the reasons which have been furnished for reopening the assessment are based on the assessment record and on the disclosures made by the assessee. Hence, the condition precedent to a valid exercise of the power to reopen an assessment beyond four years does not exist in the present case and hence the exercise of the writ jurisdiction under article 226 would be warranted.

    5. On the other hand, it has been urged on behalf of the Revenue that (i) save and except for the first issue on which the assessment is sought to be reopened, the other three issues were not considered by the Assessing Officer; (ii) Explanation 1 to section 147 provides that a mere production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered will not necessarily amount to a disclosure within the meaning of the first proviso to section 147; (iii) the proviso would apply in a situation such as the present where, according to the Revenue, the Assessing Officer has not considered three of the issues on the basis on which the assessment was sought to be reopened.

    6. Section 147 of the Income-tax Act, 1961, empowers the Assessing Officer to assess or reassess income chargeable to tax which he has reason to believe has escaped assessment and other income which comes to his notice subsequently during the course of the proceedings under the section. The existence of a reason to believe conditions a valid exercise of statutory power under section 147. The proviso, however, stipulates that where an assessment has been carried out under sub-section (3) of section 143, action after the expiry of four years from the end of the relevant assessment year would stand barred unless income chargeable to tax has escaped assessment, inter alia, by the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that assessment year. Hence, where a reopening of assessment takes place beyond a period of four years from the end of the relevant assessment year, the test which the statute requires to be applied is based on the nature of the disclosure that is made by the assessee. If the assessee has made a full and true disclosure of all the material facts for his assessment, the action of reopening the assessment would stand barred. Contrariwise, where there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, the reopening of the assessment would stand validated even if it takes place beyond the expiry of a period of four years.

    7. Explanation 1 to section 147 stipulates that the production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to a disclosure within the meaning of the first proviso. In other words, an assessee cannot rest content merely with the production of account books or other evidence during the course of the assessment proceedings and challenge the reopening of the assessment on the ground that if the Assessing Officer were to initiate a line of enquiry, he could with due diligence have arrived at material evidence. The primary obligation to disclose is on the assessee and the burden of making a full and true disclosure of material facts does not shift to the Assessing Officer. The assessee has to disclose fully and truly all material facts. Producing voluminous records before the Assessing Officer does not absolve the assessee of the obligation to disclose and the assessee, therefore, cannot be heard to say that if the Assessing Officer were to conduct a further enquiry, he would come into possession of material evidence with the exercise of due diligence. An assessee cannot throw reams of paper at the Assessing Officer and rest content in the belief that the officer better beware or ignore the hidden crevices in the pointed material at his peril.

    8. Parliament has used the word “necessarily” in Explanation 1. The expression “necessarily” means inevitably or as a matter of a compelling inference. The Oxford English Dictionary defines the expression “necessarily” as meaning (i) by force of necessity; unavoidably; (ii) as a necessary aid or concomitant; indispensably; (iii) by a necessary connexion; (iv) in accordance with a necessary law or operative principle; (v) as a necessary result or consequence; and (vi) of necessity; inevitably. The production of account books or other evidence before the Assessing Officer will not, therefore, inevitably amount to an inference of disclosure within the meaning of the first proviso. As a Division Bench of the Calcutta High Court observed in Imperial Chemical Industries Ltd. v. ITO, [1978] 111 ITR 614, the words “not necessarily” indicate that “whether it is a disclosure or not within the meaning of the said section… would depend on the facts and circumstances of each case, that is the nature of the document and circumstances in which it is produced.” (at page 639). In Rakesh Agarwal v. Asst. CIT, [1996] 221 ITR 492, the Delhi High Court held that the nature of the documents and the circumstances in which these are produced before the Assessing Officer will determine the question. If the material is not writ large on the document, but is embedded in voluminous records or books of account which require careful scrutiny by the Assessing Officer, it is quite possible that having regard to the nature of the documents, material evidence cannot be discovered from such records despite due diligence and the case would attract the Explanation.

    9. In this background, it would now be necessary to consider each of the four reasons which have weighed with the Assessing Officer in reopening the assessment.

    10. The first ground on which the assessment is sought to be reopened is that the assessee had engaged a wholly owned subsidiary for providing market development and sales support in the US. The subsidiary was being remunerated on a cost plus basis. Out of such remuneration, expenses amounting to Rs. 218.54 million (Rs. 21.85 crores) were treated as deferred over a period of two years. The assessee had amortized Rs. 9.36 crores out of the amount of Rs. 21.85 crores. According to the Assessing Officer, the assessee had claimed a deduction of Rs. 21.85 crores in the computation of income while adding back the amortized amount. However, the expenditure should have been treated as capital expenditure and the assessee is stated to have wrongly claimed the deduction towards such expenses. On this ground, it has been stated that there has been an escapement of income to the extent of Rs. 21.85 crores.

    11. Now, in considering the first ground on which the assessment is sought to be reopened reference may be made at the outset to schedule 12 of the schedules forming part of the accounts of the assessee. The assessee disclosed that the market development and support expenses were amortized to the extent of Rs. 9.36 crores. In schedule 9 the deferred revenue expenditure for market development and support expenses reflected an addition of Rs. 21.85 crores during the year. Rs. 9.36 crores was amortized during the year and was charged to the profit and loss account leaving a balance of Rs. 12.84 crores to be carried forward to the next year. The basis on which this was done was explained in paragraph 2.18 of the significant accounting policies and notes to the accounts. The statement of total income of the assessee included an amount of Rs. 9.36 crores which was added back as an item not allowable or considered separately. An amount of Rs. 21.85 crores was deducted as market development and support expenses. Note 5 of the notes attached to and forming part of the return contained a disclosure to the effect that market development and support expenditure amounting to Rs. 21.85 crores has been claimed as a deduction in the year at incurring.

    12. During the course of the proceedings, the Assessing Officer addressed a communication dated December 3, 2004, to the assessee seeking, inter alia, a disclosure together with documentary evidence in relation to market development and support expenses which were amortized. The Assessing Officer in item 15 of the letter specifically brought his attention to bear on the fact that the assessee had incurred market development expenditure at Rs. 21.85 crores and that in the profit and loss account expenses to the extent of Rs. 9.36 crores have been debited as expenses amortized while the balance was deferred as revenue expenditure. The Assessing Officer noted that in the computation of total income, the entire expenditure of Rs. 21.25 crores has been claimed as a deduction. The petitioner was called upon to explain why there was a differential treatment of the expenses in the profit and loss account vis-a-vis the computation of income and to show cause as to why the balance of Rs. 12.49 crores should not be added back to the total income of the assessee. In response to the questionnaire the assessee furnished a detailed note to the Assessing Officer by a letter dated February 7, 2005. In the course of its response, the assessee clarified that during the year it had paid an amount of Rs. 21.85 crores to its subsidiary and though the same was treated as deferred revenue expenditure in the books of account and amortized over a period of two years, the entire amount had been claimed as an expenditure. The assessee relied upon certain decisions in support of its case. It was after the assessee had filed its response that an order of assessment was passed by the Assessing Officer.

    13. The record before the court, to which a reference has been made earlier, is clearly reflective of the position that during the course of the assessment proceedings the assessee had made a full and true disclosure of all material facts in relation to the assessment. As a matter of fact, it would be necessary to note that the notice to reopen the assessment on the first issue is founded entirely on the assessment records. There is no new material to which a reference is to be found and the entire basis for reopening the assessment is the disclosure which has been made by the assessee in the course of the assessment proceedings. In Cartini India Ltd. v. Addl. CIT, [2009] 314 ITR 275 (Bom), a Division Bench of this court has observed that where on consideration of material on record, one view is conclusively taken by the Assessing Officer, it would not be open to the Assessing Officer to reopen the assessment based on the very same material with a view to take another view. The principle which has been enunciated in Cartini must apply to the facts of a case such as the present. The assessee had during the course of the assessment proceedings made a completedisclosure of material facts. The Assessing Officer had called for a disclosure on which a specific disclosure on the issue in question was made. In such a case, it cannot be postulated that the condition precedent to the reopening of an assessment beyond a period of four years has been fulfilled.

    14. In so far as the second ground for reopening the assessment is concerned, the Assessing Officer has adverted to the fact that the assessee arrived at a loss on sale of long-term investments at Rs. 2.4 million (the correct figure as a matter of fact should read as Rs. 2.04 million) whereas the amount added back to the income was Rs. 1.85 million. The balance, according to the Assessing Officer, reflects an escapement of income. Now, in so far as this aspect is concerned it is evident from schedule 12 to the profit and loss account that the assessee, as part of its selling general and administrative expenses disclosed a loss on sale of long-term investments of Rs. 2.04 million. In schedule 13 under the head of other income, the assessee disclosed a profit on the sale of current investments of Rs. 0.18 million. The statement of total income of the assessee contains an addition of a net amount of Rs. 1.85 million on account of the loss on investments. This represents the netting off of the loss of Rs. 2.04 million against a profit of Rs. 0.18 million against the sale of current investments. The learned counsel appearing on behalf of the Revenue urged during the course of submissions that from the statement of total income it is not clear as to how the loss in the amount of Rs. 1.85 million on the sale on investments is accounted for and whether this forms a part of the capital loss of Rs. 2.80 million which is to be carried forward. The difficulty in accepting the line of submission urged on behalf of the Revenue is that this is not the reason which have weighed with the Assessing Officer when the assessment was sought to be reopened. The validity of the reopening of the assessment has to be determined with reference to the reasons which had weighed with the Assessing Officer. Those norms cannot be added to or supported on a basis which was not present to the mind of the Assessing Officer when he issued the notice to reopen. That apart, when this court by its judgment dated March 10, 2010, found that the Assessing Officer had passed an order of assessment without dealing with the objections of the assessee, in breach of the judgment of the Supreme Court in G.K.N Driveshafts, [2003] 259 ITR 19. An opportunity was granted to the Assessing Officer to deal with the objections of the assessee. The Assessing Officer in the order that he thereafter passed on April 5, 2010, has not dealt with the objections of the assessee and has on the contrary held that the merits of the objections would be decided only at the stage of the assessment proceedings. Consequently, neither in the reasons advanced by the Assessing Officer for reopening the assessment nor in the order passed on the objections filed by the assessee is there any reference to the ground which has been urged in the submissions on behalf of the Revenue at the hearing of these proceedings. A ground which has no basis either in the notice for reopening the assessment or in the order dealing with the objections of the assessee cannot be heard to be urged for the first time in these proceedings, instituted under article 226 of the Constitution to challenge the reopening of the assessment.

    15. The third ground on which the assessment has been sought to be reopened is that from annexure 2, clauses 20 and 22(b) of Form 3CD an amount of Rs. 31.32 lakhs is found to be debited to the profit and loss account on account of prior period expenses. This, according to the Assessing Officer, is not allowable under the Act and should be added back. To this extent, the Assessing Officer has found that there was an escapement of income. During the course of the submissions, the attention of the court has been drawn by the learned counsel appearing on behalf of the assessee to the particulars of income and expenditure of the prior period/credited or debited to the profit and loss account. Appended to the statement are the following notes:

    “(1) Based on the recommendations of the Institute of Chartered Accountants of India in its publication Guidance Note on Tax Audit under section 44AB of Income-tax Act, 1961 at paragraph 44.2 of edition September 1999, expenditure of earlier years means expenditure which arose or accrued in any earlier year and which excludes any expenditure of any earlier year for which the liability to pay has crystallized during the year.

    (2) Excess/short provision of earlier year and income and expenditure crystallized during the year though shown above has not been considered as prior period item.”

    16. These notes, according to the assessee, are consistent with the Guidance Note issued by the Institute of Chartered Accountants of India on tax audit under section 44AB of the Act. By its note, the assessee has recorded that the expenditure of the earlier years means expenditure which arose or which accrued in any earlier year and excludes any expenditure of an earlier year for which the liability to pay has crystallized during the year. Similarly, the assessee has clarified that excess/short of provision of an earlier year and income and expenditure crystallized during the year, though shown in the statement, have not been considered as prior period items. The assessee, as the material on record would show, therefore, brought to bear the attention of the Assessing Officer to this facet while submitting the tax audit report as a part of its return of income. This is not a case where the assessee can be regarded as having merely produced its books of account or other evidence during the course of the assessment proceedings on the basis of which material evidence could have been deduced by the Assessing Officer with the exercise of due diligence. Under section 139, the assessee was under a mandatory obligation to furnish with its return of income the report of audit under section 44AB. The assessee fulfilled the obligation. The disclosures which are made as part of the report under section 44AB cannot fall file within the interdict of Explanation 1 to section 147.

    17. In so far as the fourth ground for reopening the assessment is concerned, the Assessing Officer has noted that the assessee debited an amount of Rs. 12.68 crores on account of the interest on a fixed loan to the profit and loss account which has not been capitalized. The assessee is noted to have capitalized an amount of Rs. 2.18 crores in the previous year 2000-01 on the same account. As regards this ground it would be important to note that the assessee had disclosed as part of its profit and loss account earnings before interest, depreciation and tax at Rs. 58.09 crores. The profit before tax was computed at Rs. 33.29 crores, after deducting from the aforesaid amount the interest on a fixed loan of Rs. 12.68 crores and amortization of premium on debentures at Rs. 12.11 crores. As part of its disclosure of significant accounting policies, in schedule 14 the assessee disclosed in paragraph 1.9 under the heading “Borrowing costs” that borrowing costs directly attributable to acquisition, construction and production of assets are capitalized as part of the costs of such asset up to the date of completion. In its objections to the reopening of the assessment, the assessee also noted that under section 36(1)(iii), the interest paid in respect of capital borrowed for the purposes of business or production is allowable as a deduction. Interest expenses of Rs. 12.68 crores debited to the profit and loss account were disclosed to constitute interest paid on loans taken for carrying out normal business activities and was claimed as an allowable deduction under section 36(1)(iii). The assessee drew the attention of the Assessing Officer to the fact that interest expenses of Rs. 2.18 crores referred to in the notice for reopening was capitalized in the previous year 2000-01 because they were incurred in respect of a loan taken for acquisition of fixed assets. This explanation of the assessee was evidently not considered and has not been dealt with while disposing of the objections raised by the assessee to the reopening of the assessment. For these reasons, we are of the view that the Revenue has failed to establish before the court that there was a failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment for the assessment year 2002-03. Unless this were to be the case, the exercise of the power to reopen the assessment beyond a period of four years of the end of the relevant assessment year would fail to fulfil the statutory condition precedent to a valid exercise of the power to reopen an assessment beyond a period of four years.

    18. Consequently, the petition would have to be allowed and is accordingly allowed. Rule is made absolute in terms of prayer clause (a) by setting aside the notice dated March 18, 2009. There shall be no order as to costs.

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