ACI Oils P. Ltd. vs Deputy Commissioner of Income Tax and Others

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. The original assessment, in the present case, was completed under section 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."

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."

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.

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.

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.

The learned counsel, appearing on behalf of the Revenue, relied upon a judgment of a Division Bench of the Bombay High Court in M/s. Rabo India Finance Limited Vs. Deputy Commissioner of Income Tax and others, . 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 Vs. Kelvinator of India Limited, 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 Vs. Kelvinator of India Limited, 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. Vs. R.B. Wadkar, Assistant Commissioner of Income Tax and Others (No. 1), ."

Hence, the decision would not advance the case of the Revenue.

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.

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. Vs. Commissioner of Income Tax, Mysore and Another, 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.

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. There shall be no order as to costs.