Full Judgment
B.R. Mittal, JM:
1. The assesee has filed this appeal for assessment year 2003-04 against order dated 10.5.2011 of ld CIT(A).
2 Ground No.1 of appeal is as under:
"Ld CIT(A) has erred in law and facts in passing the order u/s.250 of the Act in gross violation of principles of natural justice."
3. At the time of hearing, ld A.R. submitted that above ground is not pressed for. Hence, Ground No.1 of appeal is dismissed as not pressed for.
4. Ground Nos.2 and 3 read as under:
"2. On the facts and circumstances of the case and in law, ld CIT(A) has erred in upholding the AO's action in reopening the completed assessment u/s.147 of the I.T.Act, 1961.
3. On the facts and circumstances of the case and in law, ld CIT(A) has erred in upholding the legality of reassessment under section 147 of Income tax Act, 1961 although the AO has not disposed off the assessee's objections to the reopening under section 147 by a speaking order."
5. The relevant facts are that assessee is carrying on contract business of building of roads, bridges, tunnels, etc. For the assessment year under consideration, assessee filed return of income on 27.11.2003 declaring total income of Rs.13,98,43,639/-. The Assessing Officer completed the assessment under section 143(3) of the Act on 22.3.2006 assessing the income at Rs.14,12,36,240/-. Thereafter, AO initiated reassessment proceedings after recording reasons that he has reason to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. The reasons recorded by the AO prior to issue of notice u/s.148 of the Act are as under:
"It is noticed that total anticipated loss of Rs.9, 73,01,399/- is claimed by the assessee company in the year under consideration in respect of the four projects viz.DMRK-2, DMRC-1, Goa Bridge and Rani Lanco. The assessee company is following percentage completion method in respect of the various projects. According to the percentage of completion of the relevant projects as on 31.03.2003, the loss allowable amounts to Rs.8, 14,23,891/- only. Thus the assessee company has claimed excessive loss to the extent of Rs. 1,58,77,508/- in respect of the above mentioned projects.
In view of the above, I have reasons to believe that the income of Rs. 1,58,77,508/- chargeable to tax has escaped assessment within the meaning of section 147 read with proviso thereto by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment."
6. Thereafter, AO issued notice u/s.148 of the Act dated 31.3.2010 and initiated reassessment proceedings. Assessee disputed the action of AO to initiate reassessment proceedings. However, AO stated that it is noticed that the total anticipated loss of Rs.9,73,01,399/- is claimed by the assessee company in respect of four projects viz; DMRK-2, DMRC-1, Goa Bridge and Rani Lanco for the assessment year under consideration. Assessee is following percentage completion method and according to percentage of completion of the relevant projects as on 31.3.2003, the loss allowable amounts to Rs.8,14,23,891/- only. That assessee claimed further loss to the extent of Rs.1,58,77,508/- in respect of above mentioned projects. To verify the correct claim of loss by the assessee, the case was reopened by issue of notice u/s.148 of the Act on 31.3.2010. AO passed the assessment order u/s.143(3) r.w.s 147 of the Act disallowing assessee's excess claim of future loss of Rs.1,58,77,508. Being aggrieved, assessee filed appeal before ld CIT(A).
7. On behalf of assessee, it was contended that reopening of the case u/s.147 of the Act on 31.10.2010 was beyond four years time limit from the end of the assessment year 2003-04. That the original assessment was completed u/s.143(3) of the Act. Hence, the reopening was barred by limitation as per first proviso to section 147 of the Act. It was further stated that the loss of Rs.9.73 crores from four projects was accounted for by the assessee in its accounts and the same was considered and allowed by the A.O. at the time of original assessment. That in para 1.5 of the "notes to the financial statement", while explaining the method followed by the assessee company in revenue recognition on contracts, it had been clearly mentioned that if it is expected that contract will make a loss, the estimated loss was provided for in the books of accounts. That this was considered by the A.O. while fully allowing the estimated loss of Rs.9.73 crores from above four projects. However, later on 3 1.03.2010, the A.O. was of the view that the assessee was entitled to allowable loss of Rs.8. 18 crores ( this figure appears to be incorrect and correct figure stated in the reasons recorded in para 2 of assessment order is Rs.8.14 crores) on the basis of percentage completion method. That assessee had disclosed fully and truly all material facts relating to the loss of Rs.9.73 crores form the above four construction projects. Hence, the reopening of the assessment u/s. 147 beyond four years from the end of A.Y. 2003-04 was barred by limitation as per first proviso to the sec. 147 of the Act.
8. Ld CIT(A) after considering submissions of assessee has stated, inter alia, that it is true that assessee had made disclosure in the notes to the accounts, however, it could not be said that the disclosure was full and true or the AO considered such disclosure in the original assessment proceedings. Accordingly, ld CIT(A) rejected the contention of the assessee and justified the action of AO to initiate reassessment proceedings. Hence, assessee is in further appeal before the Tribunal.
9. On behalf of the assessee, ld A.R. contended that assessee filed the copy of the "notes of the financial statement" at the time of original assessment proceedings and stated in para 1.5 to the said note, specifically that revenue from the contract is recognized on the basis of percentage completion method and the revenue on completion depends on each contract. He submitted that ld CIT(A) at page 3 of the impugned order also has accepted this fact. He submitted that nothing new materials was found by the department from the date of original assessment order made and the date on which reassessment proceedings was initiated. He submitted that assessee had disclosed all relevant facts at the time of original assessment proceedings and the assessment order was passed after application of mind. Ld A.R. submitted that AO has mentioned in the reasons recorded that the income chargeable to tax has escaped assessment by reasons of failure on the part of the assessee to disclose fully and truly material facts necessary for assessment in terms of proviso to section 147 of the Act but in the reasons recorded, it is no where stated as to what was not disclosed by the assessee. Ld A.R. relying on the decision of Hon'ble Bombay High Court in the case of Hindustan Lever Ltd vs R.B.Wadkar, Assistant Commissioner of Income Tax and Others (No.1), 268 ITR 232 (Bom) stated that AO himself has to disclose in the reasons as to which fact or material not disclosed by the assessee fully and truly was necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. He submitted that Their Lordships have held that said vital link is the safeguard against arbitrary reopening of the concluded assessment. That the reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission. Ld A.R. submitted that Hon'ble Jurisdictional High Court in the said case held that notice was not valid and quashed the same. Ld A.R. also referred the decision of Hon'ble Bombay High court in the case of Asian Paints Ltd vs. DCIT, 308 ITR 195(Bom) and submitted that if the reassessment proceedings is initiated on the same set of facts, it would amount to change of opinion by the AO. Therefore, it was held that AO had failed to apply his mind to the relevant material while making the original assessment order; he could not take advantage of his own wrong and reopen the assessment under section 147 of the Act. Ld A.R. submitted that there were nothing new facts which came to the notice of the AO to initiate reassessment proceedings. He submitted that in view of above decision of Hon'ble Bombay High Court (supra), notice u/s.148 is liable to be quashed. Ld A.R. further referred the decision of Hon'ble Apex Court in the case of CIT vs. Kelvinator of India Ltd., 320 ITR 561(SC) and submitted that there must be tangible material before the AO to come to the conclusion that there was escapement of income from assessment and the said tangible material must have a link with the formation of the belief in the reasons recorded and if the said link is missing, initiation of reassessment proceedings is not valid. Ld A.R. also referred to the decision of Hon'ble apex Court in the case of ACIT vs. ICICI Securities Primary Dealership Ltd., 348 ITR 299(SC) and submitted that if the assessee had furnished accounts and thereafter the assessment was completed u/s.143(3) of the Act and on a mere re-look, the Officer has come to the conclusion that the income has escaped assessment, it was held that it is not permissible under the proviso to section 147 of the Income tax Act, which speaks about a failure on the part of the assessee to make a proper return. Therefore, the reopening of assessment was quashed by setting aside the notice issued u/s.148 of the Act. He submitted that Their Lordships of Hon'ble Supreme Court confirmed the decision of Hon'ble Bombay High Court. He submitted that in view of above, the initiation of reassessment proceedings by the AO is not valid and same should be quashed.
10. On the other hand, ld Departmental Representative justified the action of ld CIT(A). He submitted that merely disclosing the loss in the notes to the accounts does not amount to disclosure of fully and truly facts particularly when the AO did not address the issue in the original assessment proceedings. He submitted that Explanation (1) to section 147 of the Act states that production before the AO of account books or other evidence from which material evidence with due diligence could have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of proviso to section 147 of the Act. Ld D.R. also referred the decision of Hon'ble Bombay High Court in the case of Multiscreen Media (P) Ltd vs. Union of Indian and Anr, 324 ITR 54 (Bom). He submitted that in the said case, AO allowed deduction to the petitioner at the time of original assessment on account of expenditure incurred towards advertisement, publicity and market research. However, during the course of assessment proceedings, in the next assessment year, AO specifically made a disallowance in respect of part of the expenditure claimed to have been incurred by the assessee towards advertisements and publicity expenses on the basis of fresh material. AO reopened the assessment u/s.147 of the Act and the said action of AO was upheld by Hon'ble Bombay High Court. Ld D.R. also referred the decision of Hon'ble Madrash High Court in the case of Jayaram Paper Mills Ltd vs. CIT, 321 ITR 56(Mad). He submitted that in the said case, claim of the assessee for deduction of excessive expenditure was allowed at the time of original assessment proceedings. Later on, when the AO initiated reassessment proceedings, considering that assessee earned income solely by way of interest on fixed deposits and inter-corporate deposits and debited substantial expenditure in its profit and loss account to claim deduction against interest income, which was not incidental to earning of interest income, action of the AO to initiate reassessment proceedings was held to be justified. Ld A.R. also referred the decision of Hon'ble Allahabad High Court in the case of ENIA India Ltd vs. ACIT, 30 DTR 82(All) and submitted that when there was non consideration of certain issues by the AO in the original assessment order, initiation of reassessment proceedings on the ground that certain items of income which were not at all discussed in the original assessment proceedings and it escaped the notice of the AO as a result of which, the income chargeable to tax had escaped assessment and on those facts, it was held that it cannot be said that it would amount to review/change of opinion. That Hon'ble Allahabad High Court upheld the action of AO on the ground that mere production of the account books before the AO would not amount to disclosure within the meaning of Explanation 1 to section 147 of the Act since the same could not be discovered by the AO only with due diligence. Ld D.R. also referred the decision of Hon'ble Delhi High Court in the case of Honda Siel Power Products Ltd vs. DCIT, (2011) 197 Taxman 415 (Delhi) and submitted that non disclosure of primary facts refers to failure to fully and truly disclose material facts at the time of original assessment. He submitted that Hon'ble High Court also held that merely because material lies embedded in material or evidence, which AO could have uncovered but did not uncover, is not a good ground to deny or strike down a notice for reassessment. Ld D.R. submitted that initiation of reassessment proceedings is valid and same should be confirmed.
11. We have considered submissions of ld representatives of parties and orders of authorities below. We have also carefully considered the cases cited by ld representatives of both the parties in support of their submissions (supra).
12. There is no dispute to the fact that at the time of original assessment proceedings, assessee made disclosure in the notes to the accounts that it was following percentage completion method and the revenue from contracts is recognized on that basis. Ld CIT(A) has also stated in the impugned order that assessee has disclosed the loss of Rs.9.73 crores in the notes to the accounts. There is also not in dispute that original assessment was made u/s.143(3) of the Act and reassessment proceedings is initiated after the expiry of four years from the end of the relevant assessment year viz; 2003-04 as the notice under section 148 of the Act is dated 31.3.2010. Ld A.R. has stated that notice issued u/s.148 is barred by limitation in view of proviso to section 147 of the Act. In the circumstances, it would be useful to reproduce the relevant provisions of section 147 and 148 of the Act, which are as under:
" 147 If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provision of sections 148 to 153, assess or reassess 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 proceedings 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 as 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 failure on the part of the assessee to make a return under section 139 or in response to a notice issued under seb-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year:"
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148(1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provision of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139:]
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(2) The Assessing Officer shall before issuing any notice under this section record his reasons for doing so."
13. From the above provision of section 147, it is clear that if the AO has reason to believe that any income chargeable to tax has escaped assessment, he may, subject to the provisions of sections 148 to 153, assess or reassess 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 proceedings under section 147, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. However, when an assessment had been made u/s.143(3) for the relevant assessment year, no action can be taken under section 147 after the expiry of four years from the end of the relevant assessment year, unless the AO has reason to believe that income chargeable to tax has escaped assessment, inter alia, by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. It is also provided u/s.148(2) of the Act that before issuing notice to initiate reassessment proceedings, AO must record his reasons u/s.148 of the Act.
14. The Hon'ble Bombay High has held in the case of Hindustan Lever Ltd (supra) that reasons recorded must be based on evidence. That AO must disclose in the reasons as to which facts or material facts not disclosed by the assessee fully and truly was necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. Their Lordships have held that said vital link is the safeguard against arbitrary reopening of the concluded assessment. It was further held by Their Lordships in the above case that the reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission. In the light of above ratio, we observe on perusal of reasons record, as mentioned hereinabove in para 5, that AO has stated itself that assessee claimed in respect of its four projects viz; DMRK-2, DMRC-1, Goa Bridge and Rani Lanco, the anticipated loss of Rs.9.73 corres and as per percentage completion method of the relevant projects, the loss allowable amounts to Rs.8,40,23,891 and thus, the excessive claim of loss to the extent of Rs.1,58,76,508 in respect of above four projects have been claimed and allowed to the assessee. We observe from para 2 of the assessment order that the AO has himself mentioned that reassessment proceedings is initiated by issuing notice u/s.148 of the Act on 31.3.2010 to verify the correct claim of loss by the assessee. We observe that AO though has mentioned in the reasons recorded that said excessive claim of loss has been allowed by reasons of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment but nowhere mentioned in the reasons recorded and/or in the assessment order, as to what material facts, assessee failed to disclose fully and truly due to which the income chargeable to tax has escaped assessment. As mentioned hereinabove, Their Lordships of Hon'ble Bombay High Court in the case of Hindustan lever Ltd (supra) has mentioned that AO must disclose in the reasons as to which facts or material was not disclosed by the assessee fully and truly, which was necessary for assessment of that assessment year to establish the vital link between the reasons and evidence. We observe that the relevant material, at the time of making original assessment u/s.143(3) of the Act was available with the AO but AO failed to apply his mind to that material fact while making the said assessment order. Now the question arises as to whether, the recourse to proviso to section 147 can be taken by the AO for his own failure to apply his mind to the material, which, according to him, is relevant. The said issue has been considered by the Full Bench of Hon'ble Delhi High Court in the case of CIT vs. Kelvinator of India Ltd, 256 ITR 1(Del) and at page 9, Their Lordships have observed as under:
"The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong."
15. The said observations of Full Bench was considered by Hon'ble Jurisdictional High Court in the case of Asian Paints (supra) and in para 9, Hon'ble Court have stated as under:
"It is clear from the observations made above that the Full Bench of the Delhi High Court has taken a view that in a situation where according to the Assessing Officer he failed to apply his mind to the relevant material in making the assessment order, he cannot take advantage of his own wrong and reopen the assessment by taking recourse to the provisions of section 147. We find, ourself, in respectful agreement with the view taken by the Full Bench of the Delhi High Court."
16. The Hon'ble Bombay High Court in the case of Asian Paints (supra) have stated that the legislature has not conferred power on the Assessing Officer to review its own order. Therefore, the power under section 147 cannot be used to review the order when nothing new has happened and no new material has come on record, no new information has been received between the date of order of assessment sought to be reopened and the date of formation of information by the AO. It is merely a fresh application of mind by the same Assessing Officer to the same set of facts and the reasons. Their Lordships have held that it would amount to reopening of assessment merely because of change of opinion which is not permissible. Therefore, notice u/s.148 of the Act was held to be not valid.
17. We are of the considered view that above decision of Hon'ble Jurisdictional High Court as well as the decision of Hon'ble Delhi High Court in the case of Kelvinator of India Ltd (supra) squarely apply to the facts of the case before us as the AO in the case before us, has initiated reassessment proceedings on the same facts which were available before him at the time of making assessment u/s.143(3) of the Act and no new material has come on the basis of which it could be said that he has reason to believe that income chargeable to tax has escaped assessment on account of failure on the part of the assessee to disclose truly and fully material of facts for the assessment. The Hon'ble apex Court has also held in the case of ICICI Securities Primary Dealership Ltd (Supra) that when no new fact has come to the notice of the department, the accounts had been furnished by the assessee when original assessment was completed u/s.143(3) of the Act, , on a mere re-look, the Officer has come to the conclusion that the income has escaped assessment, is not permissible under the proviso to section 147 of the Income tax Act, which speaks about a failure on the part of the assessee to make a proper return. We are of the considered view that in the case before us, there was failure on the part of the AO to consider material placed before him at the time of making assessment and on a re-look to the said material, AO cannot reopen the assessment and that too after the expiry of more than four years from the end of the relevant assessment year to rectify his own mistake.
18. We have also considered the cases cited by ld D.R. (supra). On perusal we observe that in all the cases, reassessment proceedings were initiated within a period of four years from the end of the relevant assessment year and, therefore, said cases are not relevant to the facts of the case before us. Hence, we do not consider it necessary to discuss those cases specifically as they are not applicable to the issue involved herein.
19. In view of above discussions and the facts of the case before us, we hold that the initiation of reassessment proceedings by the AO is not legal. Hence, we hold that notice issued u/s.148 of the Act dated 31.3.2010 to initiate reassessment proceedings is not valid and same is quashed.
20. Since initiation of reassessment proceedings itself is held to be invalid and assessment order is void, we do not find it necessary to go into other grounds of appeal taken by the assessee to dispute disallowance of loss in grounds Nos.4 and 5 of the appeal.
21. In the result, appeal filed by assessee is allowed in part.