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Aci Oils P. Ltd. v. Deputy Commissioner Of Income-Tax And Another
Structured Summary of the Opinion: Reopening under section 148 — Assessment Year 2007-08
Factual and Procedural Background
The petitioner challenged a notice issued under section 148 of the Income-tax Act, 1961, which sought to reopen the assessment for assessment year 2007-08. The notice was dated March 31, 2014, and the reopening was thus made beyond four years from the end of the relevant assessment year.
The original assessment had been completed under section 143(3) by an order dated March 16, 2009. The Assessing Officer's order recorded that the assessee — a private limited company — had ceased manufacturing during the relevant year and had leased its unit (land, building and plant & machinery) to M/s. Agro Tech Foods Ltd. The assessee treated the receipts as income from other sources and claimed various expenses (administrative expenses, repairs and maintenance, financial charges and depreciation). The Assessing Officer made a partial disallowance of certain repairs and maintenance expenses (disallowing Rs. 1,25,000 out of repairs and maintenance, in respect of unverifiable electricity repair expenses).
On March 31, 2014, a notice under section 148 was issued stating the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment. On April 7, 2014, the assessee requested and received a copy of the reasons for reopening. The reasons asserted that the assessee had claimed depreciation of Rs. 24,31,484 on plant & machinery and land & building, which, according to the Assessing Officer, were not allowable under section 32(1), and therefore income to that extent had escaped assessment.
The assessee filed objections on May 27, 2014, arguing principally that there had been no failure to disclose material facts and that reopening beyond four years was unlawful. The Assessing Officer disposed of the objections by an order dated July 25, 2014. The petitioner challenged the reopening before the court, which issued the present opinion.
Legal Issues Presented
- Whether a reopening of assessment under section 148 made beyond four years from the end of the relevant assessment year is valid where the reasons for reopening do not aver a failure on the part of the assessee to fully and truly disclose all material facts required by the proviso to section 147.
- Whether reasons for reopening that are based on a perusal of assessment records (rather than an averment of non-disclosure by the assessee) satisfy the jurisdictional requirement in the proviso to section 147 for reopening beyond four years.
Arguments of the Parties
Petitioner's (Assessee's) Arguments
- The assessee contended that there was no failure on its part to disclose fully and truly all material facts necessary for the assessment.
- The assessee argued that reopening beyond four years under section 148 (and the proviso to section 147) was therefore unlawful in the present case.
- The petitioner's counsel also relied on the Supreme Court decision in I.C.D.S. Ltd. v. CIT to assert that, on merits, the assessee was entitled to claim depreciation (although the court did not decide this point once jurisdictional defect was found).
Revenue's Arguments
- The Revenue relied on a Division Bench judgment of the Bombay High Court in Rabo India Finance Ltd. v. Deputy CIT and the Supreme Court decision in Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd., arguing the tests laid down in those authorities.
- The Revenue's submissions focused on the relevance of the "tangible material" test from Kelvinator (as explained by the Bombay High Court) to justify reopening; the court noted, however, that Kelvinator's test applies to reopenings within four years and not to reopenings beyond four years where the proviso to section 147 imposes a different jurisdictional requirement.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Rabo India Finance Ltd. v. Deputy CIT, [2013] 356 ITR 200 (Bom) | Distinction between reopening within four years and reopening beyond four years; explanatory discussion of tests to be applied. | The court considered the Rabo India Finance decision but held it did not advance the Revenue's case because Rabo dealt with a reopening within four years, whereas the present case involved reopening beyond four years subject to the proviso to section 147. |
| Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd., [2010] 320 ITR 561 (SC) | Where reopening is within four years, the test is whether the Assessing Officer had tangible material to form the belief that income had escaped assessment; reason to believe cannot be a mere change of opinion. | The court reiterated Kelvinator's "tangible material" test and observed that it applies to reopenings within four years; it therefore found Kelvinator inapplicable to the jurisdictional proviso governing reopenings beyond four years in the present case. |
| Hindustan Lever Ltd. v. R.B. Wadkar, Asst. CIT (No. 1), [2004] 268 ITR 332 (Bom) | Cited in the passage explaining the nature of the reasons for reopening and the need for tangible material where reopening is within four years (as part of the authorities discussed in Rabo/Kelvinator context). | Referenced by the court as one of the authorities underlying the distinction between within-four-years and beyond-four-years reopenings; the court used this jurisprudence to explain why the Revenue's reliance was misplaced in this beyond-four-years case. |
| I.C.D.S. Ltd. v. CIT, [2013] 350 ITR 527 (SC); (2013) 3 SCC 541 | Cited by the petitioner's counsel to support the substantive contention that the assessee was entitled to claim depreciation. | The court noted the petitioner's reliance on this Supreme Court decision for the merits of the depreciation claim but held that it was unnecessary to decide that issue once the reopening was found to be jurisdictionally flawed. |
Court's Reasoning and Analysis
The court's analysis proceeded on the jurisdictional proviso to section 147 applicable when a reopening is carried out beyond four years after the end of the relevant assessment year. That proviso requires, as a jurisdictional condition, that there must have been a failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment for that year.
The court examined the reasons supplied by the Assessing Officer for reopening. Those reasons showed that the Assessing Officer's view was derived from a perusal of the assessment records, noting that the assessee had ceased manufacturing and had leased out plant & machinery and land & building while claiming depreciation. The Assessing Officer concluded that depreciation of Rs. 24,31,484 was not allowable under section 32(1) and that income to that extent had escaped assessment.
Crucially, the court observed that the reasons did not contain any averment that the assessee had failed to fully and truly disclose material facts. Instead, the reasons reflected the Assessing Officer's opinion formed on the basis of the assessment records. The court held that such a basis — forming an opinion from the assessment records without any finding of non-disclosure — does not satisfy the jurisdictional requirement of the proviso to section 147 for reopenings made beyond four years.
The court also addressed the Revenue's reliance on the Kelvinator test (as explained by the Bombay High Court in Rabo India Finance). It noted that Kelvinator's tangible material test is the applicable standard where reopening is within four years; that principle could not be extended to avoid the mandatory proviso requirement applicable to reopenings beyond four years. Therefore, the authorities invoked by the Revenue did not assist in validating the reopening in this case.
Because the jurisdictional condition in the proviso to section 147 was not met (no failure to disclose was alleged or shown), the reopening was found to be contrary to law. The court declined to decide the substantive question of whether depreciation was allowable, as the jurisdictional defect rendered such inquiry unnecessary.
Holding and Implications
Holding: The petition was allowed and the notice dated March 31, 2014, purportedly reopening the assessment under section 148 for assessment year 2007-08 was QUASHED AND SET ASIDE.
Implications:
- The direct effect is that the section 148 notice dated March 31, 2014 is voided; the attempted reassessment for assessment year 2007-08 cannot proceed on the basis of that notice.
- The court concluded that the jurisdictional requirement in the proviso to section 147 (failure to fully and truly disclose all material facts where reopening is beyond four years) was not satisfied in the present case because the reasons relied upon were based on assessment records and did not aver non-disclosure.
- The court noted that it did not decide the substantive entitlement to depreciation; no adjudication on that issue was necessary once the reopening was held to be unlawful.
- No order as to costs was made.
1. The petitioner has sought to challenge in these proceedings a notice issued under section 148 of the Income-tax Act, 1961, seeking to reopen an assessment for the assessment year 2007-08. Since the notice was issued on March 31, 2014, the reopening in the present case is admittedly beyond the period of four years of the end of the relevant assessment year.
2. The original assessment, in the present case, was completed under sec-tion 143(3) by an order dated March 16, 2009, of the Assessing Officer. The order of the Assessing Officer indicates that the assessee had duly disclosed that during the course of the assessment year in question, it had closed its manufacturing activities and had entered into a lease agreement in respect of the land and building and for plant and machinery. Against the receipts therefrom, the assessee had claimed various expenses including administrative expenses, repair and maintenance, financial charges and depreciation. The Assessing Officer made a partial disallowance while computing the income under section 115JB. For convenience of reference, the order of the Assessing Officer, in so far as is material, is extracted hereinbelow:
“The assessee is a private limited company and up to the immediate previous financial year relevant to the assessment year 2006-07 the assessee was doing the manufacturing of refined oil, vanaspati and hand made soap but during the year under consideration, it closed the manufacturing activity and has given its unit on lease to M/s. Agro Tech Foods Ltd. The income on account of lease received from M/s. Agro Tech Foods Ltd. has been shown as income from other sources by the assessee. A perusal of the lease agreement, as filed during the assessment proceedings, shows that the assessee has received an amount of Rs. 5 lakhs per month as leased amount from M/s. Agro Tech Foods Ltd. Out of the total amount, Rs. 1 lakh has been received towards land and building and Rs. 4 lakhs have been received towards plant and machinery. Against these receipts, the assessee has claimed various expenses under the head administrative expenses, repair and maintenance, financial charges and depreciation. It was submitted that the expenses have been incurred towards the maintenance of its unit as, according to the lease agreement, the assessee has to bear the cost of maintenance of the unit.
The assessee also furnished the details of these expenses.
A perusal of the details furnished in respect of repairs and maintenance shows that the assessee had claimed a number of such expenses which are not fully verifiable. Particularly the expenses towards the repairs and maintenance of electricity amounting to Rs. 2,09,764 are not supported by proper bills or vouchers. The specific details and purpose of these expenses could also not be explained convincingly. In view of this, an amount of Rs. 1,25,000 would be disallowed out of the repair and maintenance expenses to cover up the expenses which are not verifiable. This would result in an addition of this amount to the total income.”
3. A notice was issued to the assessee under section 148 on March 31, 2014, stating that the Assessing Officer had reason to believe that the income of the assessee which was chargeable to tax for the assessment year 2007-08 had escaped assessment within the meaning of section 147. On the request of the assessee which was made on April 7, 2014, a copy of the reasons for reopening the assessment was supplied. The reasons which had weighed with the Assessing Officer in reopening the assessment are thus:
“In this case, the return of income has been filed on October 6, 2007, through online declaring a total income of Rs. nil. Subsequently, assessment was completed under section 143(3) of the Income-tax Act, 1961, at a total income of Rs. 2,95,514 on March 16, 2009.
From a perusal of the assessment records it revealed that during the previous year the assessee had not done any manufacturing and trading activities and the company had given its ‘plant and machinery’ and ‘land and building’ on lease and claimed depreciation on such assets amounting to Rs. 24,31,484, which were not allowable as per the conditions provided under section 32(1) of the Income-tax Act, 1961.
Therefore, I have reason to believe that income to the tune of Rs. 24,31,484, which was chargeable to tax has escaped assessment for the assessment year 2007-08 within the meaning under section 147 of the income-tax Act, 1961.”
4. The assessee submitted its objections on May 27, 2014, principally on the ground that there was no failure on its part to disclose all the relevant and material facts for the completion of the assessment and the reopening which had taken place beyond the period of four years under section 148 was not lawful. The objections have been disposed of by an order dated July 25, 2014.
5. In the present case, the reopening of the assessment has taken place beyond a period of four years of the end of the relevant assessment year, assessment year 2007-08. The notice under section 148 was issued on March 31, 2014. Under the proviso to section 147, the jurisdictional requirement is that where a reopening of the assessment takes place beyond a period of four years after the expiry of the relevant assessment year, there should have been a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, for that assessment year. In the present case, there is merit in the submission which has been urged on behalf of the petitioner that the reasons which have been disclosed, in fact, would indicate that it is from a perusal of the assessment records that the Assessing Officer formed an opinion that income had escaped assessment.
6. The reasons which have been extracted earlier clearly indicate that, according to the Assessing Officer, it was from a perusal of the assessment records that it was revealed to her that during the previous years, the assessee had not carried out any manufacturing or trading activities and that the company had given its plant and machinery and land and building on lease, while claiming depreciation which, according to the Assessing Officer, was not allowable under section 32(1). In other words, besides the fact that there is not even an averment in the reasons to the effect that the assessee had failed to fully and truly disclose all material facts necessary for the assessment, it is evident that the reasons for reopening are based on the assessment records. Hence, there was no failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment, for the relevant assessment year. The jurisdictional condition for reopening an assessment beyond four years has hence not been fulfilled.
7. The learned counsel, appearing on behalf of the Revenue, relied upon a judgment of a Division Bench of the Bombay High Court in Rabo India Finance Ltd. v. Deputy CIT, [2013] 356 ITR 200 (Bom); [2013] 34 taxmann.com 228 (Bom). That was a case where the reopening was within a period of four years. Where a reopening of an assessment is within a period of four years, the relevant test which has been laid down in the judgment of the Supreme Court in Commissioner Of Income Tax, Delhi v. Kelvinator Of India Limited, [2010] 320 ITR 561 (SC) is whether the Assessing Officer has tangible material to come to the conclusion that there is an escapement of income from assessment. The distinction between a situation where an assessment is reopened within four years from a case where an assessment is sought to be reopened beyond four years is set out in the following extract from the judgment of the Division Bench of the Bombay High Court (page 204):
“In the present case, the assessment is sought to be reopened within a period of four years of the end of the relevant assessment year. Where an assessment is sought to be reopened beyond a period of four years, the proviso to section 147 stipulates as a jurisdictional requirement that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. Such a requirement which the proviso to section 147 stipulates in respect of a reopening beyond a period of four years is evidently not extrapolated to a situation where as in the present case the reopening is within a period of four years. Where a reopening of an assessment under section 148 takes place within a period of four years, the test that has been laid down by the Supreme Court in the Commissioner Of Income Tax, Delhi v. Kelvinator Of India Limited, [2010] 320 ITR 561 (SC) is whether the Assessing Officer had tangible material to come to the conclusion that there is an escapement of income from assessment. The Supreme Court has held that the ‘reason to believe’ that any income chargeable to tax has escaped assessment cannot be founded on a mere change of opinion. The power to reassess is not in the nature of a power to review. Hence, the true test to be applied, where a reopening takes place within a period of four years, as in the present case, is whether there exists tangible material on the basis of which the Assessing Officer has proceeded to reopen the assessment. That determination has to be made on the basis of the reasons which are disclosed to the assessee. For it is those reasons which form the foundation of the action of the Assessing Officer and form the basis on which the belief that income has escaped assessment is formed. Hindustan Lever Ltd. v. R.B Wadkar, Asst. CIT (No. 1), [2004] 268 ITR 332 (Bom); 137 Taxman 479 (Bom).”
8. Hence, the decision would not advance the case of the Revenue.
9. For these reasons, we are of the view that the reopening of the assessment is contrary to law since the requirement of the proviso to section 147 has not been fulfilled.
10. We may note that the learned counsel appearing for the petitioner has submitted, on the basis of the decision of the Supreme Court in I.C.D.S Ltd. v. CIT, [2013] 350 ITR 527 (SC); (2013) 3 SCC 541 that even on the merits, the assessee was entitled to claim depreciation. For the purposes of these proceedings, it is not necessary for the court to inquire into that aspect since once it is held that the requirement of the jurisdictional condition for reopening an assessment beyond four years was not fulfilled, the notice of the reopening would be unlawful.
11. We, accordingly, allow the petition and quash and set aside the notice dated March 31, 2014, purporting to reopen the assessment under section 148 for the assessment year 2007-08.
12. There shall be no order as to costs.
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