Reassessment after 4 years that doesn’t record CIT satisfaction is invalid

Fact and issue of the case

These two appeals filed by the assessee and the Revenue, respectively, are directed against the order of Commissioner of Income Tax (Appeals) – 5, Hyderabad dated 30.03.2016 for the assessment year 2006-07.

The abridged grounds raised by the assessee in ITA No.968/Hyd/2016 read as under :

The order of ld.CIT(A) – 5 is erroneous in law in facts and in law.

The ld.CIT(A) erred in upholding the decision of the Ld.AO in treating sale of partly paid up shares as fully paid and confirming the addition of Rs.50,14,625/- as long term capital gain.

The ld.CIT(A) erred in confirming the addition of Rs.27,69,422/- towards difference in interest.

Further, the ld.CIT(A) failed to observe that the notes to financial statements clearly mentioned the interest income which pertained to the previous year and accordingly erred in upholding the action of the Ld.AO in assessing the difference in interest of Rs.27,69,422/-.

The ld.CIT(A) erred in confirming the addition of difference of prior period income of Rs.1,26,71,371/-

The assessee had further filed the additional grounds of appeal, which read as under :

The ld.CIT(A) erred in upholding the reassessment proceedings when there was no failure or omission on part of the appellant to disclose fully and truly, all material facts while completing the original assessment u/s 143(3) of the Income Tax Act

The ld.CIT(A) erred in upholding the decision of the Ld.AO in treating sale of partly paid up shares as fully paid and confirming the addition of Rs.50,14,625/- as long term capital gain.

The ld.CIT(A) erred in confirming the addition of Rs.27,69,422/- towards difference in interest.

The ld.CIT(A) erred in confirming the addition of difference of prior period income of Rs.1,26,71,371/-.” 3. The grounds raised by the Revenue in ITA No.930/Hyd/2016 read as under :

The order of ld.CIT(A) is erroneous in law and on facts of the case.

The ld.CIT(A) erred in deleting the disallowance of depreciation on discarded assets of Rs.21,25,929/-.

The ld.CIT(A) erred in deleting the addition of Rs.1,42,37,594/-made by the Assessing Officer on account of assets discarded or written off.

The ld.CIT(A) erred in simply accepting the contention of the assessee and in not passing a speaking order on the issue of deletion of addition of Rs.1,42,37,594/- an expenditure claimed towards assets discarded / written off under prior period expenditure

The brief facts of the case are that assessee is a company engaged in the business of civil contracts, filed its return of income for A.Y. 2006-07 on 23.11.2006 declaring total income of Rs.7,79,88,094/-. The return of income was processed u/s 143(1) of the Act on 10.03.2008 and thereafter, the assessment was completed u/s 143(3) of the Act by making disallowance of Rs.52,00,000/- and Rs.12,08,208/- on account of disallowance u/s 40(a)(ia) of the Act. Thus, the income of the assessee was computed at Rs.8.43,96,302/-. In the assessment order, the Assessing Officer in para 4 has mentioned as under

It is noticed from the Annexure-13 to the Tax Audit Report submitted during the course of assessment proceedings, there is a shortfall in Tax Deduction at source to the extent of Rs.27,112/-under the head Hire Charges for Machinery

Observation of the court

Assuming the contention of the ld. DR that the proposal given by the Assessing Officer was 19.03.2012 and not 19.03.2011, in that eventuality, the re-opening has been made by the Assessing Officer beyond a period of 4 years, as the assessment in the present case was completed by the Assessing Officer on 23.04.2008. The law on the reopening beyond a period of 4 years is fairly settled and it is the mandatory requirement of law that the Assessing Officer should record that there is a failure on the part of the assessee to disclose fully and truly all the material facts necessary for completion of the assessment and further the CIT should record his satisfaction and grant approval for reopening of the assessment beyond a period of 4 years. From a reading of the reasons for belief of escaping the income and reopening of the assessment which are reproduced hereinabove, it is not possible for us to decipher that the Assessing Officer has recorded that there was any failure on the part of the assessee to disclose fully and truly all the material facts. The Assessing Officer is conspicuously silent on the above said aspect

Once the Assessing Officer has not mentioned that the assessee has failed to disclose fully and truly all material facts, necessary for completion of the assessment, the re-opening cannot be made in the eyes of law and we are in agreement with the decision cited by the ld. AR in the case of Bhor Industries (supra) and PCIT Vs. Lanco Hills (supra). In the light of the above, reopening made by the Assessing Officer is not in accordance with the law and the consequential assessment made by the Assessing Officer is also bad in law. Further, the Assessing Officer in the notice of reopening dt.28.03.2012 copy of which has already been reproduced at para 4.1 of the order had deleted that the notice was issued after obtaining the necessary satisfaction from the CIT. This fact clearly shows that at the time of issuing the notice, there was no satisfaction on record by the Revenue authorities permitting the Assessing Officer to reopen the assessment beyond a period of 4 years. Had that satisfaction was available then there was no reason for the Assessing Officer to delete the above noted facts. In view of the above, a conclusion may be drawn that the reopening was made beyond a period of 4 years without recording satisfaction by the CIT.

There is another reason for us to allow the additional grounds raised by the assessee. In our view the satisfaction / approval reproduced hereinabove have been accorded by the authorities in a mechanical manner on 19.03.2011, without looking into the proposal dt.26.03.2011 by the ACIT and without considering the proposal of the Assessing Officer dt.19.03.2012. Firstly, there was no reason for the ACIT to recommend the case of the Assessing Officer for reopening u/s 147 of the Act. The CIT was duty bound to independently apply his mind and come to the satisfaction that the said case was a fit case for reopening of the assessment beyond a period of 4 years. There was total non-application of mind by the ACIT and also by the CIT, as both the said senior officials had failed to take cognizance of the proposal dt.19.03.2012, wrongly typed as 19.03.2011 on Page 2 reproduced hereinabove. In fact, 19.03.2011 would fall within a period of 4 years whereas 19.03.2012 would fall beyond the period of 4 years. In case of any re-assessment was made beyond a period of 4 years, then recording of satisfaction by the CIT is a must under the Income Tax Act, 1961. Section 151 of the Income Tax Act, 1961 provides that no notice shall be issued by the Assessing Officer after expiry of 4 years unless the Principal Chief Commissioner or the Commissioner of Income Tax is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for issuing such notice.

The satisfaction as contemplated under Section 151 of the Act is not an empty formality as the authorities have to apply their mind and record satisfaction. When the authorities were not oblivious to the date of proposal then it cannot be said that they have applied their mind or considered the proposal of the Assessing Officer in its right earnest. In our view, if the officers have not even seen the date when it was proposed by the Assessing Officer, the question of examining other record at the time of recording the satisfaction does not arise and hence, we can safely presume that the CIT has not applied his mind to the proposal of the Assessing Officer while recording the satisfaction. The satisfaction was recorded by authorities in a mechanical and stereotyped manner and therefore, the same is not a satisfaction in the eyes of law. In view of the above, the additional ground No.1 raised by the assessee are required to be allowed as the Assessing Officer had failed to issue notice beyond a period of 4 years after recording due satisfaction in the eyes of law.

Since we have allowed the additional grounds of assessee, therefore, the grounds raised by the assessee on merit have become infructuous. Accordingly, the appeal of the assessee is allowed.

In the result, the appeal of the assessee is allowed.

Now we will take the appeal of Revenue.

As we have already allowed the additional grounds filed by the assessee, the same renders Revenue’s grounds of appeal to have become infructuous. Thus, the appeal filed by the Revenue is dismissed.

In the result, the appeal filed by the Revenue is dismissed.

To sum up, the appeal of the assessee is allowed and the appeal of Revenue is dismissed.

Order pronounced in the Open Court on 15th May, 2023.