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Income Tax Act, 1961 – Sections 143(3), 147, 148 and 151 - The assessee, filed its original and revised returns for AY 2012-13. The return was scrutinized under Section 143(3), and income was assessed. Subsequently, the AO issued a notice under Section 148 for reassessment beyond four years, alleging understatement of Long-Term Capital Gains (LTCG) and business income related to the conversion of land to stock-in-trade. The assessee disclosed all relevant details during the original assessment. The reassessment was completed, adding Rs.71,432 to LTCG and Rs.14,07,064 to business income. The CIT(A) upheld the additions - Whether the notice under Section 148 and the reassessment beyond four years were valid - Whether the reassessment additions were based on new material or merely a change of opinion - Whether the CIT(A) erred in confirming the reassessment additions - HELD - The reopening of assessment beyond four years violated the proviso to Section 147, which permits reassessment only if there is a failure on the part of the assessee to disclose fully and truly all material facts. The AO relied on existing records already scrutinized during the original assessment under Section 143(3). There was no new material brought on record to justify the reopening - Reassessment was based on the same material considered during the original assessment, amounting to a mere change of opinion, which is impermissible under law as per the Supreme Court's decision in Kelvinator of India Ltd. and other precedents - The approval under Section 151 by the Principal Commissioner of Income Tax (Pr.CIT) was mechanical and lacked independent application of mind. This further invalidated the reassessment proceedings - The Tribunal quashed the reassessment proceedings, set aside the order of the CIT(A), and directed the AO to delete the additions made under LTCG and business income. The appeal was partly allowed, rendering the merits of the additions academic

 

2024-VIL-1797-ITAT-MUM

 

IN THE INCOME TAX APPELLATE TRIBUNAL

“D” BENCH, MUMBAI

 

ITA No. 1112/Mum/2024

Assessment Year: 2012-13

 

Date of Hearing: 28.11.2024

Date of Pronouncement: 05.12.2024

 

R.R. PAINTS PRIVATE LTD

 

Vs

 

DCIT, CIRCLE-15(3)(1)

 

Assessee by: Shri Satish Modi, AR

Revenue by: Shri R.R. Makwana, Sr. DR

 

BEFORE

SHRI SAKTIJIT DEY, VICE PRESIDENT

MS PADMAVATHY S, AM

 

ORDER

 

Per Padmavathy S, AM:

 

This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi [in short 'the CIT(A)'] dated 17.01.2024 for AY 2012-13. The assessee raised the following grounds of appeal:

 

“1) The Learned Commissioner of Income-tax Appeal, National Faceless Appeal Centre, Delhi, has erred in confirming the increasing the Long Term Capital Gains by Rs 71,432/- by reworking the indexation which was correctly worked out by the appellant

 

2) The Learned Commissioner of Income-tax Appeal, National Faceless Appeal Centre, Delhi has erred in confirming making addition to business income by Rs 14,07,064/- by ignoring the market value of land at Rs 1500 per sq ft on the date of conversion (1/4/2011) and adopting the market value of land as in 2003 at Rs 1310/- per sq ft.”

 

2. The assessee is a private limited company engaged in the business of manufacturing paints and construction of buildings. The assessee filed the return of income for AY 2012-13 on 27.09.2012 declaring a total income of Rs.97,33,338. Subsequently the assessee filed the revised return on 31.10.2012 declaring total income of Rs.1,05,61,528. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The assessment under section 143(3) of the Income Tax Act 1961 (the Act) was completed on 10.02.2015 assessing the income at Rs.1,06,58,360. Subsequently the Assessing Officer (AO) reopened the assessment by issuing notice under section 148 dated 30.03.2019 for the reason that the assessee has understated the income arising from conversion land to stock in trade towards Long Term Capital Gain to the tune of Rs.71,432 and business income to the tune of Rs.14,07,112. The assessee filed objections stating that all the relevant details pertaining to the impugned transactions are disclosed in the financial statements that are already part of record and that the valuation of land as considered by the assessee is reasonable. The AO did not accept the submissions of the assessee and made the addition towards LTCG and business while completing the assessment under section 147 of the Act. On further appeal the CIT(A) confirmed the additions made by the AO. The assessee is in appeal against the order of the CIT(A) before the Tribunal.

 

3. The assessee raised an additional ground on the validity of the notice issued under section 148 of the Act. The additional grounds raised are pure legal issue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds.

 

4. The ld AR submitted that the Pr.CIT while giving approval under section 151 of the Act, has merely stated that he is satisfied, without elaborating anything about the materials placed before him and examined by Pr CIT for the purpose of satisfaction. The ld AR further submitted that the from the way the Pr CIT, has given approval it is clear that the approval is given in a routine manner without independent application of mind. The ld AR also submitted that the Hon'ble Delhi High Court in a recent judgment in the case of Capital Broadways Pvt Ltd vs ITO (W.P.(c) 4303 / 2017 dated 03.10.2024) has considered a similar issued and quashed the notice issued under section 148 of the Act.

 

5. The ld AR presented one more legal argument that the though the reopening is done beyond 4 years, the conditions for the said reopening that there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for year under consideration. The ld AR submitted that the observation of the AO that the assessee failed to submit the relevant document is factually incorrect and in this regard drew our attention to the submissions made before the AO (page 29 & 41 of paper book). Accordingly the ld AR submitted that the reason for reopening is based on mere change of opinion and that the AO has formed the belief based only on existing material. The ld AR accordingly argued that the initiation of reassessment proceedings in assessee's case is not legally tenable.

 

6. The ld DR on other hand submitted that the in the approval under section 151 of the Act, is given based on the annexure to the approval note and that recording of approval is given after examining the annexure. On the alternate legal contentions of the ld DR, relied on the orders of the lower authorities.

 

7. We heard the parties and perused the material on record. For the purpose of adjudication, we will first take up the alternate contention of the ld AR on the validity of the notice issued under section 148 of the Act. In assessee's case it is a given fact that the assessment proceedings are completed under section 143(3) (refer assessment order in page 30 to 32 of Paper Book) and that the reopening of assessment is done beyond four years from the end of the relevant assessment years i.e. on 30.03.2019. Therefore there is merit in the contention of ld AR that the Proviso to section 147 which reads as under is applicable in assessee's case –

 

Income escaping assessment.

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 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 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 failure 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 facts necessary for his assessment, for that assessment year:

(emphasis supplied)

 

8. From the plain reading of the above proviso it is clear that in cases where the assessment is completed under section 143(3), the assessing officer cannot reopening the assessment 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 disclose fully and truly all material facts necessary for his assessment, for that assessment year. Keeping in mind this position of law, we will now look at the facts in assessee's case. From the perusal of the reasons recorded as extracted in page 1 of the order under section 147, we notice that the AO has relied on the records for AY 2012-13 and notes to accounts of the financial statements where the assessee has disclosed the details of conversion of capital asset into stock in trade. Further it is relevant take note of the following observations of the AO in the order disposing the objections raised by the assessee against the order under section 148 of the Act –

 

“During the scrutiny proceedings, the assessee had never disclosed the reason for charging the valuation of land from Rs. 1,310 per sq.ft. to Rs. 1,500 per sq. ft. The then Assessing Officer, in this respect, had called for details on 22.01.2015 which is as under:

 

1) Details of revaluation of assets into stock-in-trade during the year along with supporting details, also furnish the valuation report on which basis value was taken for purpose of computing the capital gains.

 

In response, the assessee-company filed submission dated 29.01.2015 wherein the assessee-company had submitted the followings:

 

2) Basis of conversion

The assessee converted part of its industrial land at Bhandup to stock in trade when it decided to develop that portion of land into a commercial building for sale. On conversion to stock-in-trade, revaluation of land was made as on the date of conversion at Rs. 1,500 per sq. ft. Please refer to the statement attached.

 

As and when the commercial property so developed is sold, the assessee is in the computation of income calculates the long-term capital gains for sale rate up to Rs. 1,500 per sq. ft. and the balance is treated as business income. Please refer to section 45 of the Income-tax Act, 1961.”

 

9. From the above it is clear that the AO during the proceedings under section 143(3) of the Act has examined the impugned issue and based on the details furnished has accepted the income offered by the assessee. It is settled law that where the assessment is sought to be reopened after the expiry of a period of four years from the end of the relevant year, the proviso to section 147 stipulates a requirement that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary. In the given case, the assessment is sought to be reopened after a period of four years and the proviso to section 147 is applicable. The Hon’ble Supreme Court in the case of Kelvinator of India Ltd [2010] 320 ITR 561 (SC) has laid down that the AO has no power to review but only to reassess based on any new material that has come to his possession. Further the Hon'ble Bombay High Court in the case of Ananta Landmark (P.) Ltd. vs DCIT ([2021] 131 taxmann.com 52 (Bombay)) has considered a similar issue and held that –

 

17. We are satisfied that petitioner had truly and fully disclosed all material facts necessary for the purpose of assessment. Not only material facts were disclosed by petitioner truly and fully but they were carefully scrutinized and figures of income as well as deduction were reworked carefully by the Assessing Officer. In the reasons for reopening, the Assessing Officer has in fact relied upon the audited accounts to say that the claim of deduction under section 57 of the Act was not correct, the figures mentioned in the reason for reopening of assessment are also found in the audited accounts of petitioner. In the reasons for reopening, there is not even a whisper as to what was not disclosed. In the order rejecting the objections, the Assessing Officer admits that all details were fully disclosed. In our view, this is not a case where the assessment is sought to be reopened on the reasonable belief that income had escaped assessment on account of failure of the assessee to disclose truly and fully all material facts that were necessary for computation of income but this is a case wherein the assessment is sought to be reopened on account of change of opinion of the Assessing Officer about the manner of computation of the deduction under section 57 of the Act. In a similar case where the notice to reopen the assessment was founded entirely on the assessment records and the entire basis for reopening the assessment was the disclosure which has been made by the assessee in the course of the assessment proceedings and where no material to which a reference was to be found, a Division Bench of this Court in 3i Infotech Ltd. v. Asstt. CIT [2010] 192 Taxman 137, relied upon by Mr. Pardiwalla, in paragraph 12 held:

 

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

 

18. It will be proper in the circumstances to quote a paragraph from the judgment of the Apex Court in Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1, (cited by Mr. Pardiwalla), and it reads as under:

 

"It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familiarise themselves with the relevant provisions and become well versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that state issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. So far as income-tax assessment orders are concerned, they cannot be reopened on the scope of income escaping assessment under section 147 of the Act of 1961 after the expiry of four years from the end of the assessment year unless there be omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. As already mentioned, 'this cannot be said in the present case. The appeal is consequently allowed; the judgment of the High Court is set aside and the impugned notices are quashed. The parties in the circumstances shall bear their own costs throughout."

 

19. As already mentioned, it cannot be said in the present case that there was an omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. It cannot be stated that the condition precedent to the reopening of an assessment beyond a period of four years has been fulfilled. The statement in the reasons for reopening "I have reasons to believe that income of Rs. 7,66,66,663/- which was chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all facts necessary ….." is clearly made only as an attempt to take the case out of the restrictions imposed by the proviso to section 147 of the Act. As observed in Parashuram Pottery Works Co. Ltd.'s case (supra), it would be in the interest of citizens of India or we should say, civilization that those who are entrusted with the task of calculating and realising the price that we pay for the civilization should familiarise themselves with the relevant provisions and become well versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue.

 

20. Consequently, the petition is allowed. The notice dated 26th March 2019 issued by respondent no. 1 under section 148 of the Act seeking to reopen the assessment for the Assessment Year 2012-2013 and the order dated 30th September 2019 are quashed and set aside.

 

10. In assessee’s case, from the perusal of records it is clear that the assessing officer has made the additions during reassessment based on the materials which are part of assessment records which have already been verified during the original assessment u/s.143(3). It is also noticed that the assessing officer has not brought on record any new material basis which the reopening is done and that the assessing officer has used the same material as has been considered during the original assessment under section 143(3). Considering the facts of the present case and the ratio laid down by the Hon’ble Supreme Court and the Jurisdictional High Court, we set aside the order of CIT(A) and direct the AO to delete the additions made in the reassessment. It is ordered accordingly.

 

11. Since we have allowed the appeal considering the legal contentions raised by the assessee, the grounds raised with regard to additions on merits have become academic not warranting any specific adjudication.

 

12. In result the appeal is partly allowed.

 

Order pronounced in the open court on 05-12-2024.

 

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