2015 (7) TMI 764 - AT - Income Tax

Reopening of assessment - CIT(A) quashed reopening orders - Held that - In the reasons, the AO has nowhere mentioned about any kind of failure on the part of AO to disclose fully and truly all material facts. The AO adopted the figure of outstanding loan against the directors from audit report at ₹ 17,76,66,492/-, whereas in the balance-sheet it was ₹ 4,13,61,284/-. The reopening solely on the basis of different figures, appearing in the balance-sheet and in form 3CD in respect of same item, could not be done without proper application of mind before recording the reasons. The cardinal principle is that before reopening the assessment the AO should apply his mind and reach a prima facie conclusion regarding escapement of income and should not mechanically record his reasons without due application of mind. The absence of any application of mind is manifest from the fact that while making the assessment, the AO himself did not make any addition on this count. Therefore, reasons recorded on this count, were rightly not sustained by ld. CIT(A). Addition on account of repair and maintenance, building expenses and design and Act work expenses - CIT(A) deleted additions - Held that - Before AO itself the assessee had pointed out that a query was raised during assessment proceedings in respect of design and art work expenses and the same was specifically replied vide assessee s letter . Similarly, it was pointed out that in regard to repairs and maintenance of building and plant & machinery, the assessee was asked to furnish explanation for each and every item, which was duly complied with by filing a letter in this regard. Further, it was pointed out tht the details of machinery and building repairs along with the copy of bills were also filed during assessment in compliance to the requirement of questionnaire dated 29-6-2006. All these aspects have not at all been controverted by department. From the above it is evident that there was no failure on the part of the assessee to disclose fully and truly all material facts, necessary for coming to a conclusion, whether the amounts claimed by assessee in its P&L a/c were revenue or capital in nature. The AO had applied his mind during assessment proceedings and after examining in detail the evidence furnished by assessee came to the conclusion that the amounts were allowable as revenue expenditure, after disallowing ₹ 5,88,350/- under the head Repairs and maintenance , treating the same in capital field. . Therefore, it is evident that reopening has been done purely on the basis of change of opinion in regard to the items mentioned in the reasons recorded by AO, which is not permissible in view of the decision of Hon ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT OF INDIA . Also see GKN Driveshaft Ltd. ( 2002 (11) TMI 7 - SUPREME Court ) - Decided against revenue.

Summary

Issues:
1. Validity of reassessment under section 147/148 for failure to disclose material facts
2. Deletion of addition on repair and maintenance, building expenses, and design and art work expenses

Analysis:

Issue 1: Validity of reassessment under section 147/148 for failure to disclose material facts
The appeal pertains to the reassessment under section 147/148 of the Income Tax Act, 1961 for the assessment year 2004-05. The Assessing Officer (AO) initiated the reassessment based on discrepancies in the unsecured loans from directors and certain expenditures treated as capital expenses. The assessee contended that the reassessment was without jurisdiction and bad in law. The Commissioner of Income Tax (Appeals) [CIT(A)] quashed the reassessment proceedings citing various reasons. Firstly, the reassessment was initiated after the expiry of four years without any failure on the part of the assessee to disclose material facts. Secondly, the reasons for reassessment were based on Form 3CD and not new material, indicating a change of opinion. The CIT(A) also noted that the AO summarily rejected the objections raised by the assessee, contrary to the principles laid down by the Supreme Court. The ITAT Delhi upheld the CIT(A)'s decision, emphasizing the importance of the AO applying his mind before recording reasons for reassessment. The ITAT found that the reasons recorded by the AO did not demonstrate any failure on the part of the assessee to disclose material facts, rendering the reassessment invalid.

Issue 2: Deletion of addition on repair and maintenance, building expenses, and design and art work expenses
Regarding the addition made on account of repair and maintenance, building expenses, and design and art work expenses, the ITAT Delhi observed that the assessee had provided detailed explanations and evidence during the original assessment proceedings. The AO had examined these details and concluded that the expenses were revenue expenditures, except for a partial disallowance under the head "Repairs and maintenance." The ITAT noted that the reassessment was based on a change of opinion rather than new material, which is impermissible under the law. Citing the decision of the Supreme Court in the case of CIT Vs. Kelvinator of India Ltd., the ITAT emphasized that the power to reopen assessments should not be based on a mere change of opinion. The ITAT concurred with the CIT(A) that the reasons recorded for reassessment did not meet the requirements of the law and were purely a result of a change of opinion. Consequently, the ITAT upheld the CIT(A)'s order to quash the reassessment proceedings.

In conclusion, the ITAT Delhi dismissed the department's appeal, affirming the CIT(A)'s decision to quash the reassessment proceedings and delete the addition on repair and maintenance, building expenses, and design and art work expenses for the assessment year 2004-05.