2024 (6) TMI 76 - HC - Income Tax

Validity of reassessment proceedings - reason to believe - reassessment proceedings after a lapse of four years - whether there was any fresh tangible material which could have allowed the Revenue to proceed with the reopening of the assessment? - additions made by the AO on account of prior expenses , receivables and advertisement expenses HELD THAT - Recently, while dealing with a challenge laid to the initiation of reassessment proceedings, this Court S.B. Packagings Ltd. 2024 (5) TMI 321 - DELHI HIGH COURT has held that the authority to reassess income u/s 147 is circumscribed with a predominant condition that the AO must be in possession of reasons to believe that any income chargeable to tax has escaped assessment. A perusal of the reasons extracted above would evince that the AO had failed to make any specific reference to the circumstances which had triggered the Revenue to take a fresh view. The satisfaction note in the instant case finds a close resemblance with the factual matrix in Donaldson India 2015 (1) TMI 831 - DELHI HIGH COURT as the reasons herein also vaguely refer to the expression on perusal of records , rather than disclosing the foundation of reasons to believe . A plain reading of the aforesaid extract of the order of the CIT(A), which has sustained the reopening of assessment on the basis of revenue audit report, in juxtaposition with the reasons to believe would manifest that there is apparently no live link between the reasons recorded and the formation of belief to take action u/s 147 of the Act. Interestingly, while deleting the additions on merits, CIT(A) has upheld the action of reassessment by the Revenue on the ground that the factum of giving away of 75 vehicles to dealers for achieving sale targets under the guise of incentives was not disclosed in the original assessment proceedings. However, according to the CIT(A), the said fact came to the light only after the proceedings in this regard were initiated u/s 201/201 (1A) of the Act. Evidently, the proceedings u/s 201 of the Act, which have been the bedrock for reaching the conclusion that there was no full and true disclosure by the respondent-assessee, were initiated vide letter dated 09.02.2011. It is noteworthy that the notice u/s 148 which recorded the reasons for reassessment, was issued way back on 25.03.2009. Thus, by no prudent stretch of imagination, the alleged non-disclosure could have formed a part of the satisfaction which was recorded to issue notice under Section 148 of the Act. Put otherwise, the finding of the CIT(A) which had sustained the action solely on the basis of the aforesaid fact, is blatantly perverse. Undisputedly, the reassessment proceedings were initiated after passing of the period of four years from the relevant AY. An upshot of the above discussion would suggest that the Revenue did not have in its possession any fresh tangible material, which is otherwise sine qua non for initiating reassessment proceedings after a lapse of the said statutorily prescribed period. We find that the initiation of reassessment proceedings after a lapse of four years herein, is dehors the settled position of law as no new tangible material can be said to have been discovered by the Revenue which would warrant reopening the assessment for the AY in question. Thus, we do not find any reason to intermeddle with the order of the ITAT. Decided against revenue.

Summary

Issues Involved:
1. Validity of reassessment proceedings initiated by the Revenue.
2. Justification for deleting additions made by the AO on account of 'prior expenses,' 'receivables,' and 'advertisement expenses.'

Summary:

Issue 1: Validity of Reassessment Proceedings

The Revenue appealed against the ITAT's order invalidating reassessment proceedings for AY 2002-03 due to the absence of fresh tangible material. The respondent-assessee's ITR was initially processed u/s 143(1), followed by scrutiny assessment u/s 143(3), resulting in various additions by the AO. A notice u/s 148 was issued to reopen the assessment, which the respondent-assessee contested, claiming no new material justified the reassessment. The CIT(A) upheld the reassessment's validity but deleted the AO's additions. The ITAT dismissed the Revenue's appeal, supporting the respondent-assessee's cross-objection.

The Revenue argued that the audit report constituted tangible material for reassessment, citing CIT v. P.V.S. Beedies (P) Ltd. The respondent-assessee countered that the reasons for reassessment lacked any mention of failure to disclose material facts fully and truly. The court emphasized that reassessment must be based on tangible material and that the reasons recorded must show a live link with the belief of income escapement. The court found that the audit report alone could not justify reassessment, especially when initiated beyond four years without new tangible material, as established in CIT v. Kelvinator of India Ltd. and other precedents.

Issue 2: Deletion of Additions

The CIT(A) deleted additions made by the AO, finding no merit in them. The ITAT upheld this, noting no tangible material outside the record justified the reassessment. The court observed that the reasons recorded for reassessment did not specifically reference the alleged non-disclosure of material facts by the respondent-assessee. The court also highlighted that the proceedings u/s 201/201(1A), which revealed the non-disclosure, were initiated after the notice u/s 148, making the CIT(A)'s reliance on this fact for sustaining reassessment perverse.

Conclusion:

The court concluded that the reassessment proceedings initiated after four years were invalid due to the lack of fresh tangible material. Consequently, the appeal was dismissed, and the ITAT's order was upheld, confirming the deletion of additions and quashing the reassessment proceedings.