2025 (1) TMI 1560 - AT - Income Tax

Reopening of assessment - as alleged assessee was found to have inflated the corresponding acquisition of fixed assets purchased in the preceding assessment years itself corresponding depreciation claim thereupon raised herein deserves to be disallowed as a necessary corollary thereof - What failure on the part of the assessee to disclose fully and truly all material? HELD THAT - As per reopening reasons there is not even an iota of allegation against the taxpayer that it had not disclosed the relevant particulars in its returns the said section 143(3) assessment proceedings fully and truly in light of section 147 1st proviso and therefore it is prayed that CIT(A) s detailed discussion quashing the impugned reopening itself be confirmed. In Assessee s detailed paper-books all the relevant details of facts as well as case law(s) have been duly compiled. Tribunal had settled the issue long back in the preceding assessment years 2005-06 and 2006-07 that the foregoing allegation raised at the department s behest of alleged inflated purchases stood decided in assessee s favour as upheld in hon ble jurisdictional high court s itself dated 14.09.2016. Revenue could hardly dispute that all these developments took place well before the AO had set into motion his section 148/147 proceedings. As decided in Hindustan Liver Ltd. Vs. R.B. Wadkar 2004 (2) TMI 41 - BOMBAY HIGH COURT that once there is no scope of any addition/deletion or substitution in the reopening reasons recorded by the learned prescribed authority as the same have to be read on standalone basis CIT(A) has rightly decided the instant legal issue in assessee s favour and against the department whilst invoking section 147 1st proviso as well as going by the various judicial precedents. The same are hereby upheld in the Revenue s instant appeal which stands rejected in very terms. Revenue s appeal is dismissed.

Summary

The core legal questions considered by the Appellate Tribunal in this matter revolve around the validity and legality of the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961, for the assessment year 2009-10. Specifically, the issues are:

1. Whether the notice issued under section 148 of the Act is valid or bad in law, particularly on the ground that the Assessing Officer (AO) failed to prove any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, as required by the proviso to section 147.

2. Whether the AO's reasons for reopening the assessment, based on alleged inflated purchases of capital goods in earlier assessment years leading to diversion of profits and depreciation claims in the year under consideration, are legally sustainable.

3. Whether the learned Commissioner of Income Tax (Appeals) erred in not adjudicating the merits of the additions related to late payment surcharge (LPSC), power theft, and capitalization of personnel costs, holding these grounds academic following the quashing of reassessment proceedings.

4. Ancillary procedural issues such as delay in filing the appeal and the Revenue's reservation of rights to amend grounds of appeal.

Issue-wise Detailed Analysis:

Validity of Reopening Notice under Section 148 and Compliance with Section 147 Proviso

The Tribunal extensively analyzed the statutory framework governing reassessment proceedings under sections 147 and 148 of the Income Tax Act. Section 147 empowers the AO to reassess escaped income if he has reason to believe that income chargeable to tax has escaped assessment. However, the proviso to section 147 imposes a critical limitation: where an assessment under section 143(3) has been completed, reassessment beyond four years from the end of the relevant assessment year is permissible only if the income has escaped assessment due to the failure of the assessee to disclose fully and truly all material facts necessary for assessment.

The Tribunal emphasized that the AO must form a bona fide belief based on credible, specific, and contemporaneous information available before issuing the notice under section 148. The belief must be the AO's own satisfaction, not borrowed from other authorities, and mere suspicion or conjecture is insufficient. The reasons recorded for reopening must be clear, specific, and relate directly to the alleged escaped income. Furthermore, the AO must supply a copy of the reasons to the assessee, allowing the latter to file objections before reassessment proceedings commence, following the procedural safeguards laid down by the Supreme Court in GKN Driveshaft and subsequent High Court and Tribunal decisions.

In the present case, the AO issued the notice within the statutory time limit but after completion of regular assessment under section 143(3). The reopening was thus subject to the proviso's stringent requirement that the income escaped due to the assessee's failure to disclose material facts. The Tribunal found that the AO's reasons merely alleged failure to disclose without specifying any instance or tangible material withheld by the assessee. The reopening was based on verification of material already on record rather than new undisclosed facts. This failure to specify any non-disclosure rendered the reopening notice invalid.

The Tribunal relied on authoritative precedents, including the Supreme Court's ruling in ACTT Vs. Dhariya Construction Co., which held that opinions or reports from other authorities (such as the District Valuation Officer) do not constitute information justifying reopening unless the AO applies his own mind and forms independent belief. The Tribunal also cited numerous High Court and Tribunal decisions reinforcing that non-compliance with the proviso's conditions invalidates reassessment proceedings.

Assessment of AO's Reasons Regarding Inflated Capital Goods Purchases and Depreciation Claims

The AO's stated reason for reopening was that the assessee allegedly made inflated purchases of capital goods in earlier assessment years (2005-06 and 2006-07) at prices 68% higher than the purchase price, leading to diversion of profits and resulting in depreciation claims in the year under consideration (2009-10). The AO contended that this justified reassessment.

The Tribunal noted that these issues relating to earlier years had already been adjudicated and settled in favour of the assessee, including by the jurisdictional High Court, well before the reopening notice was issued. Since the reopening related to the 2009-10 year and was premised on facts already conclusively decided, the AO could not rely on these settled issues to form a fresh belief of escaped income. Moreover, the reopening reasons did not demonstrate any new or undisclosed material facts by the assessee for the year under consideration.

The Tribunal observed that the reopening was effectively an attempt to revisit settled matters without any fresh basis, which is impermissible. The AO's reliance on prior years' issues without nexus to the current year's material facts was held to be legally untenable.

Non-Adjudication of Merits of Additions on LPSC, Power Theft, and Capitalization of Personnel Costs

The CIT(A) declined to adjudicate the merits of additions relating to late payment surcharge, power theft, and capitalization of personnel costs, holding these grounds academic following the quashing of the reassessment proceedings. The Revenue challenged this approach.

The Tribunal endorsed the CIT(A)'s approach, reasoning that once the reassessment proceedings were held invalid and quashed, the issues raised therein lost their legal foundation. Without valid reassessment, the AO lacked jurisdiction to make such additions. Therefore, the merits of these additions could not be examined in the absence of valid proceedings. This position aligns with settled principles that substantive adjudication on merits requires valid jurisdiction and procedural compliance.

Procedural and Ancillary Issues

The Tribunal noted the Revenue's reservation of rights to amend or add grounds of appeal but did not find this relevant to the core legal issues decided. The question of delay in filing the appeal was raised but not elaborated upon, suggesting no significant procedural infirmity affecting the outcome.

Significant Holdings and Core Principles Established:

The Tribunal's reasoning crystallizes several key principles governing reassessment under the Income Tax Act:

o The AO's power to reopen assessment under section 147 is circumscribed by the proviso when regular assessment under section 143(3) has been completed. Reopening beyond four years is valid only if there is failure by the assessee to disclose fully and truly all material facts.

o The AO must form an independent, credible, and specific belief based on information available before issuing the notice under section 148. Mere suspicion or information from other authorities without AO's own satisfaction is insufficient.

o Reasons recorded for reopening must be clear, specific, and disclose tangible instances of non-disclosure by the assessee. Vague or general allegations do not satisfy the statutory requirement.

o The AO cannot rely on issues already conclusively decided in earlier years or settled by courts to justify reopening for a later year without new undisclosed facts.

o Procedural safeguards, including supplying reasons to the assessee and disposing of objections before reassessment, are mandatory and integral to the validity of reassessment proceedings.

o If reassessment proceedings are quashed for invalid reopening, the merits of additions raised therein become academic and cannot be adjudicated.

o The Tribunal upheld the CIT(A)'s quashing of the reassessment proceedings and dismissed the Revenue's appeal, affirming that the reopening notice under section 148 was bad in law for failure to comply with the proviso to section 147.

Verbatim excerpt capturing the Tribunal's crucial legal reasoning:

"The entire premise of the re-assessment was based on scrutiny and verification of the material already existing on record and not even an iota of any new tangible material which the assessee had failed to disclose was brought on record by the AO. It has been held in several decisions of Hon'ble High Courts that, if the reasons recorded for reopening the assessment after expiry of four years from the end of the relevant assessment year do not specify that the income has escaped assessment on account of default on failure on the part of the assessee to disclose material facts, the entire re-assessment proceeding and re-assessment order would be invalid."

In conclusion, the Tribunal's decision reinforces the strict procedural and substantive safeguards embedded in the Income Tax Act to protect taxpayers from arbitrary reopening of assessments and underscores the necessity for the AO to demonstrate concrete failure by the assessee to disclose material facts when invoking the proviso to section 147. The ruling also highlights the finality of judicial decisions on earlier years and the limited scope for reopening assessments based on settled matters.