Reopening in case of previously completed scrutiny cannot be taken up after 4 years – ITAT

Section 147 of the Income Tax Act deals with provisions of “income escaping assessment”. Thegrounds or reasons which led to formation of the belief that income chargeable to tax has escapedassessment must have a material bearing on the question of escapement of income of the assesseefrom assessment because of his failure or omission to disclose fully and truly all material facts. Theexpression “reason to believe” does not mean a purely subjective satisfaction on the part of theIncome Tax Officer. The reason must be held in good faith. It cannot merely be a pretence.

Before making the assessment, reassessment or re-computation under section 147, the Assessing Officer should serve on the assessee a notice requiring him to furnish a return of income. However, there is atime-limit for issue of Notice for Income Escaping Assessment. Notice can be issued within 4 years from the end of relevant assessment year.If, however, the escaped income is Rs. 1,00,000 or more, notice can be issued within 6 years from the end of the relevant assessment year.Where income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment, notice can be issued within 16 years from the end of the relevant assessment year.

Let us refer to the case of HLG Memorial Hospital Pvt. Ltd. Vs ACIT (ITAT Kolkata), where the assessee challenged the reopening of assessment under Section 147 in this case as bad in law.

Facts of the Case

• The assessee filed its original return of income on 15/11/2007.
• The original assessment was completed u/s 143(3) on 31/12/2009.
• Thereafter reasons for reopening were recorded by the Assessing Officer and notice u/s 148 of the Act, reopening the assessment was issued on 09/07/2013.

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Assessing Officer (AO) had reopened the assessment by recording the following reasons:

• On scrutiny of the case file for the A.Y. 2007-08, it was observed from the schedule of depreciation that the assessee had claimed depreciation @ 40% instead of 15% on Medical devices such as USG, X-Ray and on UPS etc. which were not enlisted under the category of Life Saving medical equipments for depreciation @40% as stated in the schedule of depreciation as per the Income Tax Rules, 1962.
• It was also observed that the assessee hadwrongly claimed depreciation @ 10% on Building under construction.
• In the light of the above facts, it was apparent that the assessee had claimed excess depreciation which was liable for addition to the total income chargeable to income tax.
• Therefore, AO had reason to believe that the above amount had escaped assessment for the A.Y. 2007-08 and therefore it was a fit case for reassessment u/s 147.

Proceedings of CIT(A) and ITAT

• Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the reopening of the case by the AO under Section 147.
• Aggrieved with the order of the CIT(A), assessee filed an appeal before the Income Tax Appellate Tribunal [ITAT].
• However, ITAT found on a perusal of the reasons recorded, that there was no allegation that the assessee has failed to disclose truly and fully, all the material facts necessary for the assessment.

Reference to Tao Publishing (P) Ltd. v. Dy CIT (2015) by ITAT

• The Bombay High Court in the case of Tao Publishing (P) Ltd. v. DyCIT (2015), held that the reasons supplied to the Petitioner did not disclose that there was any failure on the part of the Petitioner to provide all the material facts.
• Therefore, this ground could not have been taken up against the Petitioner at the time of disposing of the objections.
• Once that was not the basis for issuance of notice for Reassessment, it cannot be held against the Petitioner that the Petitioner had failed to make a true and full disclosure.
• The Petitioner did not fail to make full and true disclosure of all material facts.
• Hence, the requirement for carrying out the reassessment, after the expiry of period of four years, was not fulfilled in the present case.

Reference to Sound Casting (P) Ltd. v. Dy. CIT by ITAT

The Bombay High Court in the case of Sound Casting (P) Ltd. v. Dy. CIT held that there was no strength in the reasons which were disclosed to the assessee that there was any failure on his part to fully and truly disclose material facts necessary for assessment and therefore reopening beyond 4 years was not valid.

Reference to CIT vs. Orient Craft Ltd[2013] by ITAT

• The Delhi High Court in the case of CIT vs. Orient Craft Ltd [2013] held that the reasons recorded by the AO confirmed apprehension of the HC about the harm that a less strict interpretation of the words “reason to believe” vis-à-vis an intimation issued under section 143(1) can cause to the tax regime.
• There was no mention in the reasons recorded, of any tangible material which came to the possession of the AO subsequent to the issue of the intimation.
• It reflected an arbitrary exercise of the power conferred under section 147.

Reference to Haryana Acrylic Manufacturing Co. v. Commissioner of Income-Tax by ITAT

• The Delhi High Court in the case of Haryana Acrylic Manufacturing Co. v. Commissioner of Income-Tax [2009] held that the proviso to section 147, carved out an exception from the main provisions of section 147.
• If a case were to fall within the proviso, whether or not it was covered under the main provisions of section 147 would not be material.
• Once the exception carved out by the proviso came into play, the case would fall outside the ambit of section 147.
• Examining the proviso, Delhi HC found that no action can be taken under section 147 after the expiry of four years from the end of the relevant assessment year if the following conditions are satisfied:
• an assessment under section 143(3) or section 147 has been made for the relevant assessment year; and
• 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 section 142 or section 148; or
• to disclose fully and truly all material facts necessary for his assessment for that assessment year.
• Condition (a) was satisfied as the original assessment was completed under section 143(3).
• Condition (b) deals with a special kind of escapement of income chargeable to tax.
• The escapement must arise out of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under section 142 or section 148.This was not the case here because the petitioner did file the return.

• Since there was no failure to make the return, the escapement of income cannot be attributed to such failure.
• That wasleft with the escapement of income chargeable to tax which arose out 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.
• If it is was found that the petitioner had disclosed fully and truly all material facts necessary for its assessment, then no action under section 147 could have been taken after the 4-year period indicated above.
• In the reasons supplied to the petitioner, there was no mention, that the petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of that failure there was an escapement of income chargeable to tax.
• Merely having a reason to believe that income had escaped assessment, is not sufficient to reopen assessments beyond the 4-year period.
• The escapement of income from assessment must also be occasioned by the failure on the part of the assessee to disclose material facts, fully and truly.
• This is a necessary condition for overcoming the bar set up by the proviso to section 147. If this condition is not satisfied, no action under section 147 could be taken.
• Thus, HC held that the notice dated under section 148 based on the recorded reasons as supplied to the petitioner as well as the consequent order were without jurisdiction as no action under section 147 could be taken beyond the 4-year period in the circumstances narrated above.

Observations of the ITAT in the present case

• Applying the propositions laid down in the above case law to the facts to this case, ITAT held that the re-opening of the assessment proceedings was not valid that there was not even a mention in the reasons recorded for the reopening of the assessment that there was a failure on the part of the assessee to disclose fully and truly all the necessary material facts required for assessment in view of the 1^stproviso to Section 147.
• In this case no tangible materials came to the possession of the AO subsequent to the Assessment Order u/s 143(3).
• Re-opening was done based on the same material and record and hence was bad in law and thus the appeal of the asseessee was allowed and the assessment under Section 147 was quashed.

In conclusion, one needs to remember that the re-opening of assessment under Section 147 is bad in law if it does not fulfil the requirement of the Proviso to Section 147 of the Act and if no tangible material has come to the possession of the Assessing Officer.

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