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Siva Industries and ... v. ACIT,, CHENNAI

Income Tax Appellate Tribunal
Jul 30, 2012
Judgment
Subsequent
References
CaseIQ
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CASE NO.

Cross Objection 129/CHNY-2012

Attorney(S)

ACTS

sub-section (3) of section 143 or this section

sub-section (1) of section 142 or section 148

sub-section (3) of section 143 or section 147

SECTION 147 INCOME TAX ACT 1961

Income Tax Act 1961, in short 'the Act'.

provisions of the new section 147,

Act. I.T.A. No1158 & CO 129/Mds/12 5

section 142 or section 148

u/s.143(3) of the I.T. Act

Laws (Amendment) Act, 1987,

Amending Act, 1989,

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Structured Summary of the Tribunal Opinion (ITA No.1158 & CO 129/Mds/12)

Factual and Procedural Background

The matter arises from an order of the CIT(Appeals)-V dated 29.2.2012 (CIT(A)-V/ITA No.491/2009-10) in proceedings under section 143(3) read with section 147 of the Income Tax Act, 1961 for the assessment year 2002-03 (assessment year 2003-04). The assessee, a company engaged in finance, property development and software, had filed its return on 31.10.2002 declaring a loss of Rs. 3,73,69,044. The Assessing Officer completed the assessment under section 143(3) on 31.3.2005 assessing the loss at Rs. 3,02,01,092.

On 7.5.2008 the Assessing Officer issued a notice under section 148/147 stating that income had escaped assessment. The reasons supplied with the reopening notice referred to the balance-sheet composition (loans being lower than investments) suggesting loans were taken to sustain investments that yielded exempt income and that associated interest expenses (notably interest of Rs. 22,11,420 / financial charges shown as Rs. 22,59,992) were incurred. In re-assessment, the AO invoked section 14A and disallowed Rs. 21,61,600 by a computation shown in the order dated 30.12.2009.

The assessee appealed to CIT(Appeals) challenging both the legality of the reopening and the merits. CIT(Appeals) upheld the reopening but restricted the section 14A disallowance to Rs. 7,23,719 (comprising admitted direct expenses of Rs. 4,13,719 plus Rs. 3,10,000 computed at 2% of dividend income of Rs. 1,55,00,000). The Revenue appealed to the Tribunal against the restriction of disallowance; the assessee filed cross-objections challenging the legality of the reopening.

Legal Issues Presented

  1. Whether the reopening undertaken by the Assessing Officer by notice dated 7.5.2008 under section 148 (read with section 147) and upheld by CIT(Appeals) is liable to be confirmed or should be set aside (i.e., whether the reopening was validly made)?
  2. If the first issue is decided against the assessee (i.e., reopening is valid), whether the CIT(Appeals) order limiting the disallowance under section 14A from Rs. 21,61,600 to Rs. 7,23,719 is to be upheld?

Arguments of the Parties

Assessee's Arguments (Authorised Representative / Cross Objections)

  • Procedural/limitation challenge: The reopening notice dated 7.5.2008 was time-barred under the proviso to section 151 (and section 147 framework) because the relevant assessment year was 2002-03 and the four-year period from the end of that assessment year expired on 31.3.2007; hence a notice issued on 7.5.2008 was beyond that period. It was also submitted that the proviso required satisfaction of the Chief Commissioner/Commissioner (or specified higher-ranking officer) for a notice issued after four years, which was not shown to have been done.
  • Jurisdictional/legislative challenge: Under section 147 (proviso), reopening after four years is permissible only where income escaped assessment by reason of failure by the assessee to make a return or to disclose fully and truly all material facts. The AR contended there was no failure to disclose full particulars in the original assessment and that the reasons recorded in the reopening notice were vague and lacked any allegation of non-disclosure; therefore the AO lacked jurisdiction to reopen.
  • Merits challenge to AO's inference: On merits the AR argued that the balance-sheet percentages (loans vs. investments) relied upon by the AO permitted an inference that the assessee used its own funds for investments rather than loans taken for investments. The assessee had furnished balance sheets and schedules and had disclosed dividend income (Rs. 1.55 crores) in the original assessment. The AR also supplied the break-up of the admitted expenses (total Rs. 22,59,992) to show that the assessee had explained the expenditures and there was no material supporting the AO's conclusion that the expenses were incurred solely for earning exempt income.
  • Authorities cited in support of the assessee's position before the Tribunal included: Shanti Vijay & Co. v. ITO (60 TTJ 748), CIT v. Anjum M. Ghaswala (252 ITR 1), AayojAn Developers v. ITO (335 ITR 234 — Gujarat), CIT v. Elgi Finance Ltd. (286 ITR 674 — Madras High Court), Arunkumar v. Union of India (reported at 286 ITR 39), among others.

Revenue's Arguments (Departmental Representative)

  • The Departmental Representative submitted that the plea challenging the jurisdiction of the Assessing Officer to reopen the assessment had not been specifically raised in the grounds of appeal, and therefore the assessee's cross-objections should be rejected as not maintainable. The Revenue relied on the CIT(Appeals) order which had upheld the reopening and restricted the section 14A disallowance to Rs. 7,23,719.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court in this Opinion
ITAT (SB) Mumbai in CIT v. Daga Capital Management; Mexopp Investments Ltd. v. ACIT (ITA No.183/Del/2005); M/s. Cheminvest Ltd. v. DCIT (ITAT No.2048/Del/2005) Authorities relied upon by the Assessing Officer to support invocation of section 14A where the assessee failed to justify its claim. The AO placed reliance on this catena to justify applying section 14A and recomputing disallowance. The Tribunal recorded that the AO had relied on these cases in reaching his conclusion but, on review of the record and the reopening reasons, the Tribunal did not accept the AO's basis for reopening or the computation as a ground to sustain the reassessment.
Shanti Vijay & Co. v. ITO (60 TTJ 748) Cited by the assessee in support of the contention that a reopening notice issued after four years (and without required higher officer satisfaction) is invalid. The AR relied on this decision as supporting law for invalidity of time-barred notices. The Tribunal considered the argument in the context of other higher-court precedents and accepted the assessee's broader limitation and jurisdictional arguments.
CIT v. Anjum M. Ghaswala (252 ITR 1) Cited by the assessee for the principle that reopening after four years requires compliance with the proviso (failure to disclose fully and truly) and that mere escapement of income is insufficient. The Tribunal considered this authority as part of the authorities supporting the assessee's contention that the AO must record a failure to disclose when reopening after four years; the Tribunal's holding reflects this principle.
AayojAn Developers v. ITO (335 ITR 234 — Gujarat) Cited in support of the proposition regarding the validity of reopening notices and the requirement of higher authority's satisfaction in certain circumstances. Referred to by the assessee; the Tribunal treated this as part of the jurisprudence indicating limits on reopening powers and considered it when evaluating the reopening notice's sufficiency.
CIT v. Elgi Finance Ltd. (286 ITR 674 — Madras High Court) Principle: Where the assessee has fully and truly disclosed material facts in the original assessment, reopening beyond four years is impermissible unless the AO records failure by the assessee to disclose fully and truly. The Tribunal expressly relied on this reasoning to hold that reopening after four years must be supported by reasons showing default by the assessee; since the reopening notice lacked such a record, the Tribunal found the reopening unjustified on that ground.
Arunkumar v. Union of India (reported at 286 ITR 39) Cited by the assessee in relation to the jurisdictional/limitation arguments concerning reopening. Used by the assessee to buttress the contention that reopening must comply with proviso requirements; the Tribunal considered it among authorities supporting the assessee's position.
CIT v. Kelvinator of India (320 ITR 561) Principle: Reopening is not a review or mere change of opinion; post-amendment to section 147 reopening requires "reason to believe" supported by tangible material and a live link between reasons and formation of belief; an in-built check exists to prevent reopening on mere change of opinion. The Tribunal quoted Kelvinator at length and applied its principle that reopening must be based on tangible material and not mere change of opinion; on that test the Tribunal found the reopening notice deficient because it did not demonstrate such material or a live link to a belief of escapement arising from non-disclosure.
Fenner (India) Ltd. v. Deputy CIT [2000] 241 ITR 672 Discussed in the context of the scope of the proviso to section 147 (i.e., the pre-condition that failure to disclose is necessary when reopening beyond four years). Referred to by the Tribunal (via discussion in Elgi Finance) to underline that when reopening occurs beyond four years, the AO must record the default/failure; absence of such record invalidates reopening. The Tribunal followed this line of authority.

Court's Reasoning and Analysis

The Tribunal proceeded in a structured manner:

  1. Maintainability of Cross Objections: The Tribunal rejected the Revenue's argument that the assessee could not raise the jurisdictional challenge by way of cross-objections because the plea was not specifically raised before the AO or CIT(A). The Tribunal held that cross-objections are a recognized remedy for a respondent to defend an impugned order and that a challenge to the jurisdiction to reopen (a plea going to the root of the matter) is properly entertainable in cross-objections. Therefore the assessee's cross-objections were admitted.
  2. Examination of reopening facts and timing: The Tribunal noted the original assessment under section 143(3) was completed on 31.3.2005 after considering the assessee's disclosure (including dividend income of Rs. 1.55 crores). The reopening notice was issued on 7.5.2008 — more than five years from the end of the relevant assessment year.
  3. Requirement under section 147 proviso and judicial precedent: The Tribunal relied on binding/high authority jurisprudence (notably CIT v. Kelvinator and the Madras High Court in CIT v. Elgi Finance) that reopening after the period of four years requires, in addition to a belief that income escaped assessment, a recorded reason showing failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The Tribunal emphasized that reopening cannot be based on mere change of opinion and must be supported by tangible material that forms a live link to the belief that income escaped assessment.
  4. Application to the present record: The Tribunal found that the reopening notice contained only a bald reference to balance-sheet percentages and a conclusionary statement suggesting loans were taken to sustain investments generating exempt income. The Tribunal observed there was no material in the notice showing the assessee had failed to disclose particulars, nor was there any new material discovered after the assessment to justify reopening. The balance-sheet ratios, in the Tribunal's view, could equally support an inference that the assessee used its own funds for investments.
  5. Assessment on merits of the reopening reasons: Even on the merits of what the reopening reasons purported to show, the Tribunal found the AO's conclusion unjustified because there was no evidence that loans were taken solely to make investments producing exempt income. The AO had not identified any new tangible material to form the "reason to believe" required under Kelvinator and related authorities.
  6. Conclusion from analysis: In view of the lack of recorded failure to disclose and absence of tangible material linking the reassessment to escapement by reason of non-disclosure, the Tribunal accepted the assessee's jurisdictional and merits objections to the reopening. Consequently the Tribunal held that the assessee's cross-objections succeeded and the Revenue's appeal failed.

Holding and Implications

Holding: Assessee's Cross Objections allowed; Revenue's appeal dismissed.

Implications and direct consequences:

  • The Tribunal accepted the assessee's challenge to the validity of the reassessment proceedings (both jurisdictional and on the limited merits), concluding that the reopening notice lacked the necessary recorded reasons and tangible material required to form a "reason to believe" that income had escaped assessment after the four-year period. As a result, the reassessment initiated by the AO by the notice dated 7.5.2008 was not sustained by the Tribunal.
  • Because the Tribunal allowed the assessee's cross-objections, the Revenue's appeal against the CIT(A)'s order (which had restricted the disallowance under section 14A) was dismissed. The immediate effect is in favour of the assessee as reflected in the order: the cross-objections succeed and the Revenue's challenge is rejected.
  • The opinion applies established precedents (Kelvinator, Elgi Finance and related authorities) to the facts and does not purport to lay down any novel principle; the Tribunal expressly applied those authorities to the record before it. The decision's effect is the resolution of the parties' dispute in this case; the opinion does not state that a new legal precedent was created beyond applying existing law.

Order pronounced on 30 July 2012 at Chennai. Members: Abraham P. George (Accountant Member) and S.S. Godara (Judicial Member).

Show all summary ...

PER S.S. GODARA, JUDICIAL MEMBER : This Revenues appeal and Assessees Cross Objection emanate from the order of the CIT(Appeals)-V, dated 29.2.2012 in case No.CIT(A)-V/ITA No.491/2009-10 for Asst. Year 2009-10 in proceedings under sec.143(3) read with sec.147 of the Income Tax Act 1961, in short 'the Act'.

2. The Revenue before us has stated that the CIT(Appeals) has erred in restricting disallowance u/s 14A of the Act made by Assessing Officer from E21,61,600/- to E.7,23,719/- and in deleting Assessing Officers calculation under rule 8d of i.t. rules. The assessee on the other hand has supported CIT(Appeals)s findings on merits. On the other hand, it has pressed its cross objections questioning of legality of reopening which has been rejected by CIT(Appeals). Since the outcome of Revenues appeals depends on our decision on assessees cross objections, therefore, we frame following issues for adjudication of the case in the right perspective:-

i) Whether the of reopening in question taken recourse to by the Assessing Officer vide notice dated 7.5.2008 under sec.148 of the Act and upheld by CIT(Appeals), is liable to be confirmed or modified per respective stands of the parties?

I.T.A. No1158 & CO 129/Mds/12 ii) If first issue is decided against the assesse, then, whether the order of CIT(Appeals) on merits limiting the disallowance u/s.14A of the Act made by Assessing Officer from E 21,61,600/- to E.7,23,719/- is to be upheld or not?

3. The relevant facts qua both the inter connected issues are that the assessee (a company engaged in the business of finance, property development and software) filed its return on 31.10.2002 for Asst. Year 2003-04, declaring loss of E.3,73,69,044/-. The Assessing Officer, vide order dated 31.3.2005 completed assessment u/s.143(3) of the Act and assessed the loss as E.3,02,01,092/-.

4. Thereafter, on 7.5.2008, the Assessing Officer issued reopening notice u/s.148 read with sec.147 of the Act stating therein that assessees income had escaped assessment. On the asking of the assessee, the reasons for re- opening (as supplied to assessee) read as follow:- On the opening date of the balance sheet for the financial year 2001-02, the loans constitute 5.8% of the balance sheet total and investments constitute 25.28%. On the closing date of the balance sheet the loans constitute 0.11% and investments constitute 18.32%. On both the opening and closing dates of the balance sheet, the amount/quantum of loans is less than the investments made. It clearly suggests that the loans were taken and continued only for the purpose of making and

I.T.A. No1158 & CO 129/Mds/12 sustaining the investments, the income arising from which is exempt. Hence, the expenditure incurred in relation to such investments is to be disallowed as required u/s.14A of the IT Act. The assessee incurred interest expenses of E.22,11,420/- on the loans, which were used solely for investments.

5. In re-assessment proceedings, the assessee adhered to its earlier return and opted not to file a fresh one. The Assessing Officer went through the assessees income schedule showing receipt of E 1.55 crores as dividend income which was claimed as exempt income under sec.10(33) of the Act and observed that in the computation, proportionate expenditure attributable in earning the same had not been disallowed. Per Assessing Officer as on 31.3.2002, the investments in quoted and unquoted shares investments were of E 36,11,23,180/- and the assessees financial charges shown to have been incurred stood at E. 22,59,992/-. Therefore, the Assessing Officer formed a prima facie opinion that the assessee might also have incurred some routine expenditure for maintaining its establishments and administration a portion of which could have been attributable towards investments in question. Hence, the Assessing Officer asked the assessee to produce details of expenditure.

6. The assessee in reply stated that it had not incurred any expenditure qua earning exempt income. Along with the same it also contested the validity of re-opening by terming it as time barred ie. after expiry of four years from relevant Asst. Years and not covered by the specific circumstances postulated under sec.147 of the Act.

I.T.A. No1158 & CO 129/Mds/12

7. The Assessing Officer in re-assessment order dated 30.12.2009 negated the assessees contention qua legality of re-opening as well as its plea on merits by observing that the assessees disclosure of income was full but not true and there were reasons to believe that its income had escaped assessment.

8. Further, by placing reliance on a catena of case laws namely ITAT(SB) Mumbai in CIT V. Daga Capital Management Mexopp Investments Ltd. V. ACIT (ITA No.183/Del/2005) and M/s. Cheminvest Ltd. V. DCIT (ITAT No.2048/Del/2005), the Assessing Officer held that assessee had failed to justify the correctness of claim. Therefore, Assessing Officer invoked sec.14A of the Act and re-computed the assessees income as under:- Amount of expenditure attributable to exempt income Nil (1) Interest payments (A) 22,59,992 (2) Average value of investment Opening balance 371549403 Closing balance 361123180 (B) 36,63,36,291 (3) Average value of total assets Opening balance 2311724795 Closing balance 2707187521 (C) 250,94,56,158 A X B/C E 3,29,919 0.5% of Average Investments (0.5% of E 36,63,36,291/-) E18,31,681/- Total E 21,61,600/-

6. As per the above working, the disallowance to be made u/s.14A comes to E21,61,600/- which is disallowed and brought to tax. Loss assessed u/s.143(3) of the I.T. Act dated 31.03.2005 (-) E 3,02,01,092/- Less : Disallowance u/s.14A as discussed above E 21,61,600/-

I.T.A. No1158 & CO 129/Mds/12 Loss assessed (-) E 2,80,39,492/- Tax thereon Nil Less : TDS E 35,84,172/- Excess Paid E 35,84,172/- Add : Interest u/s.244A E 1,59,812/- E 37,43,984/- Less : Refund already determined and issued E 37,43,984/- Balance refundable/payable Nil_____

8. Aggrieved, the assessee preferred appeal before CIT(Appeals) challenging re-assessment order on legality as well as on merits. We find from CIT(Appeals)s order that the re-assessment on issue of validity has been upheld whereas on merits only disallowance of E 7,23,719/- ( E 4,13,719 in the shape of admitted direct expenses + E 3,10,000/- @ 2% of the assessees dividend income of E 1,55,00,000/-) has been confirmed instead of E 21,61,000/- made by Assessing Officer) thereby allowing assessees appeal in part.

9. It is in this backdrop of facts that on the one hand, Revenue is impugning restrictions of disallowance (supra), on the other hand, the assessee has questioned the very legality of re-assessment. As already clarified, now we proceed to examine the cross objections hereunder.

10. Opening his arguments, the Authorised Representative has submitted as under:- (a) Firstly, by drawing our attention to re-opening u/s.148 of the Act notice dated 7.5.2008, it has been submitted that the bottom line of the same reads as under :-

I.T.A. No1158 & CO 129/Mds/12 This notice is being issued after obtaining the necessary satisfaction of Addl. Commissioner of Income Tax. Thereafter, the Authorised Representative has made us to go through 1st provisio of sec.151 of the Act which reads as follows :-

151. (1) In a case where an assessment under sub-section (3) of section 143 or section 147 has been made for the relevant Asst. Year, no notice shall be issued under section 148[by an Assessing Officer, who is below the rank of Assistant Commissioner [or Deputy Commissioner], unless the [Joint] Commissioner or Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice] : Provided that, after the expiry of four years from the end of the relevant Asst. Year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice. In the light thereof, principle contention of the Authorised Representative is that in the instant case, the Asst. Year is 2002-03. The period of 4 years from the end of relevant Asst. Year is upto 31.3.2007 whereas in the present case, the re-opening notice is time barred since it was issued on 7.5.2008. His further submission is that the notice is invalid because as per proviso, it has to be either after satisfaction of Chief Commissioner or Commissioner only which has not been done in the instant case. The case relied upon by

I.T.A. No1158 & CO 129/Mds/12 Authorised Representative in support of this argument are 60 TTJ 748 Shanti Vijay & Co. v. ITO (Delhi High Court) and 252 ITR 1 CIT v. Anjum M Ghaswala and 335 ITR 234 (Gujarat) AayojAn Developers v. ITO. (b) The 2nd line of A.Rs argument is that u/s.147 (1st Proviso) of the Act which reads as under:- [Income escaping assessment.

147. If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment15 for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess15 such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings15 under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure16 on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts16 necessary for his assessment, for that assessment year: It has been submitted that the Assessing Officer has got jurisdiction to re-open an assessment only if there has been failure on part of the assesse in disclosing full particulars of income

I.T.A. No1158 & CO 129/Mds/12 which could lead to an opinion that any income chargeable to tax has escaped assessment. Therefore, per Authorised Representative, the reasons forming basis of re-opening are vague as there has not been any fault of the assesse stated in disclosing full particulars of its income. To buttress his plea, he has cited case law of 286 ITR 674 in the case of CIT v. Elgi Finance Ltd. (Madras High Court) and 286 ITR

39 Arunkumar v. Union of India. (C) The next argument of the Authorised Representative is on merits. He argued that in assessment, the assessee had duly enclosed its balance sheet and other relevant material. By referring to the reasons of re-opening it has been emphasized that in Asst. Year 2001-02, loans constituted 5.8% of balance sheet total and investments stood @ 25.28%. On closing date of the balance sheet, loans were @ 0.11% and investment stood @ 18.32%. Per A.R, this factual position leads to only one inference that the assessee had its own funds which were utilized in investments in question. He has also referred to the details of total expenditure admitted as E 22,59,992/- (supra) as under :- Expense Head Amount Purpose Bank Charges E 48,572/- Expenses incurred during the course of business Interest AMEX Bonds E 11,22,888/- Loan was taken in FY 1999-00 Repayment of loan is out of internal accruals Interest on Hire Purchase E 3,67,056/- Vehicle Hire Purchase Interest OD Interest E 1,15,921/- Expenses incurred during the

I.T.A. No1158 & CO 129/Mds/12 course of business IL&FS Loan E 4,13,719/- Interest on Sales Tax E 34,362/- Expenses incurred during the course of business Interest on TDS E 1,55,065/- On belated payment of TDS. Disallowed in computation. Total E 22,59,992/- In the light thereof, his argument is that there was no occasion based on any evidence/material so as to support the findings of A.O. In view of these arguments, the Authorised Representative has prayed for acceptance of the cross objections and rejection of appeal.

11. The Departmental Representative representing Revenue has submitted that plea challenging jurisdiction of Assessing Officer qua re- opening has not been specifically raised in grounds. and prayed for rejection of Cross Objections filed by assessee. Further, he has also placed reliance on CIT(Appeals)s order.

12. We have heard both representatives in detail and also gone through the relevant findings, contents of Paper Book and case law cited. So far as maintainability of Cross Objections in hand is concerned, we are unable to agree with Revenues plea that the same are not maintainable only because the assessee has not raised the plea of jurisdiction in reopening Assessment before A.O. as well as CIT(Appeals). We are not convinced with this stand of Revenue because under the law, the Cross objections are

I.T.A. No1158 & CO 129/Mds/12 a remedy available to a respondent to defend the impugned order as well as to prefer Cross objection alike a separate appeal In the instant case, the assesse has questioned the very validity of reopening on the ground of jurisdiction of A.O., being violative of provisions of the Act. In our opinion, the assesse, is duly entitled to raise this plea as the same goes to the root of the matter. So, we entertain the assessees Cross Objections.

13. Further, it transpires from the record that the Assessing Officer had finalized assessment under sec.143(3) of the Act on 31.3.2005 wherein amount of loss claimed in return of E 3,73,69,044/- was modified to E 3,02,01,092/-. No doubt, in the assessment order, the issue of disallowance u/s.14A of the Act was not considered. However, the assessment was completed after considering assessees claim of E 1.55 crores as exempt u/s.10(33) of the Act. The assessment finalized on 31.3.2005 was reopened by notice under sec.148 dated 7.5.2008 ie. after more than five years from the end of relevant Asst. Year. It is also evident that in the notice of reopening there is not even an iota of allegation that any income had escaped assessment attributable to failure on the part of the assessee in not disclosing full particulars. The Honble Supreme Court of India in case law CIT v. Kelvinator of India (320 ITR 561) has held that reopening is not review or mere change in opinion. The operative part is reproduced as follows :- On going through the changes, quoted above, made to section

147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfillment of the said conditions alone

I.T.A. No1158 & CO 129/Mds/12 conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549 dated October 31, 1989 ([1990] 182 ITR (St.) 1, 29), which reads as follows : "7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in section 147.-A number of representations were received against the omission of the words `reason to believe' from section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary

I.T.A. No1158 & CO 129/Mds/12 powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same." For the aforestated reasons, we see no merit in these civil appeals filed by the Department ; hence, dismissed with no order as to costs. Not only this, in the case of CIT v. Elgi Finance (supra), the Hon'ble Jurisdictional High Court has also been pleased to hold regarding principles of re-opening as under :- In the present case, the question is whether the assessee- company had disclosed fully and truly all the material facts necessary for the assessments and with particular reference to computation of depreciation allowance. The assessee company had filed a full set of accounts before the Assessing Officer comprising profit and loss account, balance sheet and schedules thereto. The assessee-company had furnished the details regarding the acquisition of various machinery and assets and the details regarding the leasing out of those machinery and items to other parties. The assessee had also furnished the details of lease rent received out of those lease agreements. The assessee had also furnished the detailed computation of depreciation mentioning therein the written down value of machinery and assets before and after claiming the depreciation allowance for the impugned assessment years. It is a factual finding by the Tribunal that the assesse company had fully and truly disclosed all material facts necessary for working out the quantum of depreciation allowance and completed the assessment accordingly. The Tribunal is right in following the judgment of the learned single judge of this court reported in Fenner (India) Ltd.

v. Deputy CIT [2000] 241 ITR 672. In the said judgment, the learned single judge considered the scope of the proviso to section 147 of the Income-tax Act in detail and held as follows (page 677) :

I.T.A. No1158 & CO 129/Mds/12 The pre-condition for the exercise of the power under section

147 in cases where power is exercised within a period of four years from the end of the relevant assessment year is the belief reasonably entertained by the Assessing Officer that any income chargeable to tax has escaped assessment for that assessment year. However, when the power is invoked after the expiry of the period of four years from the end of the assessment year, a further pre-condition for such exercise is imposed by the proviso namely, that there has been a failure on the part of the assessee to make a return under section 139 or in response to a notice issued under section 142 or section 148 or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. Unless, the condition in the proviso is satisfied, the Assessing Officer does not acquire jurisdiction to initiate any proceeding under section 147 of the Act after the expiry of four years from the end of the assessment year. Thus, in cases where the initiation of the proceedings is beyond the period of four years from the end of the assessment year, the Assessing Officer must necessarily record not only his reasonable belief that income has escaped assessment but also the default or failure committed by the assessee. Failure to do so would vitiate the notice and the entire proceedings. The relevant words in the proviso are, . . . unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee . . . Mere escape of income is insufficient to justify the initiation of action after the expiry of four years from the end of the assessment year. Such escapement must be by reason of the failure on the part of the assessee either to file a return referred to in the proviso or to truly and fully disclose the material facts necessary for the assessment. Whenever a notice is issued by the Assessing Officer beyond a period of four years from the end of the relevant assessment year, such notice being issued without recording the reasons for his belief that income escaped assessment, it cannot be presumed in law that there is also a failure on the part of the assessee to file the returns referred to in the proviso or a failure to fully and truly

I.T.A. No1158 & CO 129/Mds/12 disclose the material facts. The reasons referred to in the main paragraph of section 147 would, in cases where the proviso is attracted, include reasons referred to in the proviso and it is necessary for the Assessing Officer to record that any one or all the circumstances referred to in the proviso existed before the issue of notice under section 147. After an assessment has been made, in the normal circumstances, there would be no reason for anyone to doubt that the assessment has been made on the basis of all relevant facts. If the Assessing Officer chooses to entertain the belief that the assessment has been made in the background of the assessee's failure to disclose truly and fully all material facts, it is necessary for him to record that fact, and in the absence of a record to that effect, it cannot be held that a notice issued without recording such a fact is capable of being regarded as a valid notice. As to whether the material facts disclosed by the assessee are full and true is always a question of fact and unless the facts disclosed had been examined in relation to the extent of failure if any on the part of the assessee, it is not possible to form the opinion that there had been a failure on the assessee's part to truly and fully disclose the material facts. A notice issued without a record of the Assessing Officer's reasonable belief that there was such failure on the part of the assessee would be indicative of a failure on the part of the Assessing Officer to apply his mind to material facts, and on that ground also the notice issued would be vitiated. So, when the factual finding is that the assessee-company had fully and truly disclosed all material facts necessary for computing the depreciation allowance in the course of the original assessments completed under section 143(3) itself, the period of limitation applicable to the reopening for these two years would be a period of four years prescribed in the proviso to section 147 of the Income-tax Act, 1961. For the said two years, notice under section 148 had been issued after the expiry of four years from the end of the assessment years, 1992-93 and 1993-94. In respect of the assessment year 1992-93, notice if at all necessary, should have been issued on or before March 31, 1997, whereas in fact the notice was issued only on July 17, 1998. For the assessment year 1993-94, notice under section 148 should have been issued on or before March 31, 1998, whereas in fact, the notice was issued only on July 17, 1998. So, notice under section

148 for both the assessment years was issued after the expiry of four years from the respective assessment years. Therefore, any

I.T.A. No1158 & CO 129/Mds/12 notice issued after the expiry of four years from the end of the relevant assessment year, is illegal and is without jurisdiction. Hence the assessment years completed, are barred by limitation and they are liable to be set aside. In view of the above reasoning, the reassessments for the assessment years 1992-93 and 1993-94 are clearly barred by limitation and in view of the same, we answer the question in favour of the assessee. Accordingly, the tax cases are dismissed. No costs.

14. Taking cue from above case law, we also hold that the Assessing Officer is of course empowered to reopen any assessment already finalized but subject to provisions of the Act. Instead of there being mere change of opinion already formed, it should be based on some material available on record leading to conclusion that the assessee had not disclosed particulars of the income escaped(supra). In the instant appeal, we notice that except bald reference, there are no such reasons forthcoming in reopening notice.

15. Even on merits as far as reasons leading to reopening are concerned, it emerges from perusing the notice that it was based on the assumption that on the opening and closing dates of balance sheet, since amount/quantum of loans turned out to be less than the investments made per A.O. it suggested that loans were obtained for purpose of meeting and sustaining investments leading to exempt income. We are not in agreement with this conclusion because it can be easily implied in such circumstances that the assesse had its own funds available for investment. We observe that there is no material cited in support either which was already available

I.T.A. No1158 & CO 129/Mds/12 at the time of assessment or any new evidence which the Assessing Officer came across thereafter.

16. In view of our discussions hereinabove, we accept the assessees arguments No. (b) & (c) as above impugning re-assessment on validity and merits. So far as argument (a) above is concerned, in view of our specific findings on (b) & (c), we hold that the same is only of academic significance. The necessary corollary of our above conclusion is that assessees C.O. succeeds and Revenues appeal stands dismissed.

17. The Order was pronounced after hearing on Monday, the 30th day of July 2012 at Chennai. Sd/- sd/- (ABRAHAM P. GEORGE) (S.S. GODARA ) ACCOUNTAT MEMBER JUDICIAL MEMBER Chennai, Dated : 30 July 2012 Jls. Copy to:- (1) Appellant (2) Respondent (3) CIT-II, Coimbatore (4) CIT-III, Coimbatore (5) D.R., (6) Guard file

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