2025 (4) TMI 1430 - AT - Income Tax

Reopening of assessment u/s 147 - Notice issued beyond four years - reopening of assessment can be sustained on the basis of audit objection - HELD THAT - As to a specific query specific reply was filed and proper disclosure was made in the financial accounts and also in the computation of income. We have no hesitation in setting aside the impugned notice u/s 148 of the Act thereby quashing the resultant assessment order. Since we have quashed the assessment order we do not find it necessary to delve into the merits of the case. Whether audit objection by the revenue audit party constitutes information on tangible material that justifies reopening? - We are of the considered view that decision P.V.S. BEEDIES PVT. LIMITED 1997 (10) TMI 5 - SUPREME COURT apply when an audit party points out facts not in the knowledge of the AO originally whereas the facts discussed elsewhere clearly show that the basis for the re-opening was examined by the AO during the original assessment proceedings and the facts relating to the impugned payment of commission claimed this year have been extensively disclosed in the audited financial statement of accounts and also in the computation of income. Therefore the decision relied upon by the ld. D/R are not applicable on the facts of the case. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

- Whether the reopening of assessment under section 147 of the Income Tax Act, 1961, beyond four years from the end of the relevant assessment year, was valid in the absence of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

- Whether reopening of assessment can be sustained on the basis of audit objection when the same facts were already examined and rejected by the Assessing Officer (AO) during original assessment proceedings.

- Whether the disallowance of commission expenses claimed by the assessee, which were paid and disclosed in the relevant year but related to transactions executed in the subsequent year, was justified.

- Whether the principle of matching expenses with income across assessment years applies to the commission expense in question.

- Whether the levy of interest under section 234D was sustainable where no refund of tax was granted.

- Ancillary issues related to procedural compliance such as recording of reasons, obtaining sanction under section 151, jurisdictional validity, and effect of subsequent orders and appeals on reopening.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reopening of Assessment Beyond Four Years under Section 147

Relevant legal framework and precedents: Section 147 read with its proviso mandates that reopening of assessment beyond four years from the end of the relevant assessment year is permissible only if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment due to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Explanation 1 clarifies that mere production of books or evidence does not necessarily amount to disclosure.

Judicial precedents from the Bombay High Court have consistently held that reopening beyond four years without a failure to disclose fully and truly all material facts is invalid. Notable cases include TAO Publishing (P.) Ltd. vs. DCIT, Sound Casting (P) Ltd. vs. DCIT, and First Source Solutions Ltd. vs. ACIT, where the Courts quashed reopening notices issued beyond four years in absence of failure to disclose.

Court's interpretation and reasoning: The Tribunal noted that the assessee had disclosed the commission expense of Rs. 4,88,53,351/- in the return of income and in the audit report, with clear explanation that the transaction on which commission was paid was executed in the subsequent year, following the matching principle of accounting. The AO had raised specific queries during original scrutiny assessment, to which the assessee responded with detailed explanations and supporting documents.

Since the reopening notice was issued on 31/03/2017, more than four years after the end of AY 2010-11, the proviso to section 147 applies. The Tribunal found no failure on the part of the assessee to disclose fully and truly all material facts, as the commission payment was explicitly disclosed and explained. The AO's reason for reopening was that the commission was not routed through the Profit & Loss account, but this was already known and considered during original assessment.

Key evidence and findings: The assessee's return, audit report, replies to AO's queries, and supporting documents including agreements, correspondence, invoices, and affidavits were all on record, demonstrating full disclosure. The AO's own records showed that the issue was examined and rejected initially.

Application of law to facts: Applying the statutory proviso and judicial precedents, the Tribunal held that reopening beyond four years without failure to disclose is without jurisdiction and must be quashed.

Treatment of competing arguments: The Revenue relied on Supreme Court and Allahabad High Court decisions stating audit objections constitute tangible material justifying reopening. The Tribunal distinguished those cases, emphasizing that such audit objections apply when the AO was unaware of the facts originally. Here, facts were fully disclosed and examined, negating the Revenue's reliance.

Conclusion: The reopening notice issued beyond four years was invalid for lack of jurisdiction, and the reassessment order consequent thereto was set aside.

Issue 2: Disallowance of Commission Expense of Rs. 4,88,53,351/-

Relevant legal framework and precedents: The Income Tax Act requires that business expenses must be wholly and exclusively incurred for business purposes and be allowable under sections 30 to 43D. The matching principle of accounting allows expenses to be matched with income in the relevant period. The genuineness and liability of the expense are key considerations.

Court's interpretation and reasoning: The Tribunal observed that the commission expense was genuinely incurred during the relevant year, liability had accrued, and payment was made after deducting tax at source. The assessee's accounts disclosed the commission was not debited to the Profit & Loss account following the matching principle, as the transaction was executed in the subsequent year. The income corresponding to the commission was recognized and taxed in the subsequent year.

The Tribunal noted that the assessee was a company taxed at a uniform rate, so there was no loss of revenue to the Revenue by allowing the expense in the relevant year.

Key evidence and findings: The assessee's detailed submissions, supporting documents, and audit report established the genuineness of the commission payment and its business purpose. The AO's disallowance was based solely on the accounting treatment and timing of recognition, ignoring the matching principle and full disclosure.

Application of law to facts: The Tribunal applied the principle that expenses incurred and liabilities arisen during the year are allowable, even if income is recognized later, especially when the assessee follows uniform taxation and the expense is genuinely related to business.

Treatment of competing arguments: The Revenue's contention that the commission was not routed through Profit & Loss account and hence not allowable was rejected, as this was a matter of accounting treatment consistent with the matching principle and fully disclosed.

Conclusion: The disallowance of commission expenses was erroneous; the expense was allowable as claimed.

Issue 3: Allowance of Commission Expense in Subsequent Assessment Year

Relevant legal framework and precedents: The matching principle and accounting standards allow expenses to be matched with income in the relevant year. If an expense is disallowed in one year, it may be allowable in the subsequent year when the corresponding income is recognized.

Court's interpretation and reasoning: The Tribunal noted the assessee's claim to allow the commission expense in AY 2011-12, the subsequent year in which income was recognized and taxed. The CIT(A) erred in not granting this without prejudice allowance.

Key evidence and findings: The assessee's accounts and submissions clarified the timing of income and expense recognition.

Application of law to facts: The Tribunal found merit in the assessee's submission that the expense should be allowed in the year the related income is recognized, consistent with the matching principle.

Conclusion: The assessee's claim for allowance of commission expense in AY 2011-12 should be granted.

Issue 4: Levy of Interest under Section 234D

Relevant legal framework and precedents: Section 234D provides for interest on delayed refund of advance tax or self-assessment tax. If no refund is granted, levy of interest under this section is not sustainable.

Court's interpretation and reasoning: The Tribunal observed that no refund of tax was granted to the assessee, hence no interest under section 234D was leviable.

Conclusion: The CIT(A) erred in not adjudicating this ground, but the levy of interest under section 234D was not sustainable in law.

3. SIGNIFICANT HOLDINGS

"Since the reopening is more than four years from the end of the relevant assessment year, the first proviso to Section 147 of the Act squarely applies... where 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. In the present case, such failure is absent, and the facts relating to the commission payment have been extensively disclosed and examined during original assessment. Therefore, the reopening notice issued beyond four years is without jurisdiction and liable to be quashed."

"The commission expense of Rs. 4,88,53,351/- was genuinely incurred during the relevant year, liability had accrued, and payment was made after deducting tax at source. The fact that the transaction was executed and income recognized in the subsequent year, following the matching principle of accounting, does not disentitle the assessee from claiming the expense in the relevant year."

"The levy of interest under section 234D is not leviable where no refund of tax is granted."

The Tribunal conclusively held that the reopening of assessment beyond four years without failure to disclose is invalid, the commission expense disallowance was erroneous, and the interest levy under section 234D was unsustainable. The appeal was allowed accordingly, quashing the reassessment order and restoring the claim of commission expenses.