AMIT BAJAJ ADVOCATE

Mumbai ITAT has held in a very important following case that when only intimation u/s 143(1) is being issued and no assessment is framed u/s 143(3) even then reaaseessment u/s 147/148 shall be invalid in the absesnce of new material.

In this case The AO accepted the ROI filed by the assessee u/s 143(1). He thereafter issued a notice u/s 148 on the ground that the assessee had claimed a deduction for ERP software and that although only 20% of the said expenses was debited to the P&L A/c, the entire amount was claimed as a deduction. The assessee claimed that the reopening was not valid as there was no “new material” in the AO’s possession. 

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

I.T.A. No. 2230/Mum/2010., I.T.A. No.2476/Mum/2010, Assessment Year: 2001-02.

Date of pronouncement: 07-10-2011.

Per P.M. Jagtap, A.M. :

These two appeals, one filed by the assessee being ITA No. 2230/Mum/2010 and other filed by the Revenue being ITA No. 2476/Mum/2010, are cross appeals which are directed against the order of learned CIT(Appeals)-4, Mumbai dated 18- 01-2010.

3. Against the order passed by the AO u/s 143(3) read with section 147, an appeal was preferred by the assessee before the learned CIT(Appeals) challenging therein the validity of the said assessment as well as the various additions/disallowances made therein. The learned CIT(Appeals) did not find merit in the case of the assessee on the preliminary issue challenging the validity of the order passed by the AO u/s 143(3) read with section 147 and rejecting the same, he upheld the validity of the said assessment. He also confirmed the disallowance made by the AO on account of expenses incurred on ERP Software treating the same as of capital nature. He, however, allowed the claim of the assessee for depreciation at the rate of 100% in respect of Pollution Control and Energy Saving Devices and deleted the disallowance made by the AO on this issue. Aggrieved by the order of the learned CIT(Appeals), the assessee and Revenue both are in appeal before the Tribunal.

4. In ground No.1 of its appeal, the assessee company has raised a preliminary issue challenging the validity of assessment made by the AO u/s 143(3) read with section 147 on the ground that the initiation of reassessment proceedings itself was bad in law.

5. The learned counsel for the assessee at the outset invited our attention to the copy of reasons recorded by the AO for reopening the assessment placed at page No.1 of his paper book and pointed out that there was no reference to any new material coming to the possession of the AO on the basis of which belief about the escapement of income was entertained by the AO to reopen the assessment. Relying on the Third Member decision of Mumbai Bench of ITAT in the case of Telco Dadaji Dhackjee Ltd. vs. DCIT (ITA No. 4613/Mum/2005 dated 12th May, 2010), he contended that in the absence of any such new material, the reopening of assessment itself was bad in law and the assessment made in pursuance thereof is liable to be cancelled being invalid.

6. The learned DR, on the other hand, submitted that the return filed by the assessee in this case was originally processed u/s 143(1) and even in the absence of any new material coming to the possession of the AO, it was permissible to reopen the assessment. He invited our attention to the reasons recorded by the AO and submitted that there was a valid reason specifically given by the AO which formed the basis for the belief entertained by him regarding escapement of income of the assessee from assessment. He contended that the reopening of assessment on the basis of the said reasons was thus valid even in the absence of any new material coming to the possession of the AO since the assessment in this case was originally made u/s 143(1) and not u/s 143(3). In support of this contention, he relied inter alia, on the decision of Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500.

7. In the rejoinder, the learned counsel for the assessee submitted that the decision of Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) relied upon by the learned DR has been considered by the Third Member in the decision of Telco Dadaji Dhackjee Ltd. (supra) and after taking into consideration the said decision as well as of subsequent decision of Hon’ble Supreme Court in the case of Kelvinator of India Ltd. reported in 256 ITR 1, the Third Member has held that reassessment proceedings initiated by the AO was liable to be quashed where there was no fresh material available with the AO in a case where assessment had been completed originally u/s 143(1). He has contended that the preliminary issue involved in the present case thus is squarely covered in favour of the assessee by the said decision of Third Member and this Division Bench is bound to follow the same being equivalent to a Special Bench decision as held by Hon’ble Delhi High Court in the case of P.C. Puri vs. CIT 151 ITR 584.

8. We have considered the rival submissions and also perused the relevant material on record. It is observed that the assessment completed in this case originally u/s 143(1) was reopened by the AO for the following reasons recorded u/s 148(2) :

“ From the Balance Sheet, Annexure 11, it is seen that assessee has incurred expenses towards Enterprise Resource Planning Software amounting to Rs.95,14,000/-.

In the accounts, the assessee has debited 25% of this amount i.e. 23,78,500/- whereas in the computation of income, the assessee has claimed entire amount of Rs.95, 14,000/- as a deduction. The expense incurred by the assessee towards Enterprise Resource Planning Software is payment for acquisition of software which is capital in nature and hence the assessee’ s claim of the same as revenue expenses is not allowable.”

As is clearly evident from the reasons recorded by the AO, there was no new material coming to the possession of the AO on the basis of which the assessment completed u/s 143(1) was reopened and this position has not been disputed even by the learned DR. Relying on the decision of Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), he, however, has contended that the reopening of assessment completed originally u/s 143(1) is permissible without there being any new material coming to the possession of the AO if the reasons recorded for reopening of the assessment are otherwise valid. The learned counsel for the assessee, on the other hand, has relied on Third Member decision of the Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) stating that a similar issue involved in the said case has been decided by the Third Member in favour of the assessee after taking into consideration the decision of Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) relied upon by the learned DR. In the said case, the return, filed by the assessee was originally accepted u/s 143(1). In the said return the assessee had claimed deduction for payment of non-compete fees of Rs.75 lakhs which included payment of Rs.15 lakhs towards Directors. The assessee had also claimed depreciation of Rs.1,41,858/- on lease premises. The AO issued notice u/s 148 on the ground that these were not allowable expenses and income chargeable to tax had escaped assessment. He accordingly disallowed both the items in the reassessment order. When the matter reached to the Tribunal, the learned Judicial Member took the view that there was no fresh material to support the formation of the belief of the AO that income chargeable to tax had escaped assessment and in the absence of any fresh tangible material, he came to the conclusion that it was not permissible for the AO to reopen the assessment. The learned Accountant Member, however, took a different view relying on the decision of Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and the matter, therefore, was referred to a Third Member for resolving inter alia, the following point of difference:

“ Whether on the facts and circumstances of the proceedings initiated by the AO u/s 147 is liable to be confirmed or quashed when there was no fresh material available with the AO and the assessment had been completed originally u/s 143(1).”

The Third Member agreed with the view taken by the learned Judicial Member relying mainly on the decision of Hon’ble Supreme Court in the case of Kelvinator of India Ltd. (supra) and Eicher Ltd. 320 ITR 561. It was held by the Third Member that section 147 applies both to section 143(1) as well as section 143(3) and, therefore, except to the extent that a reassessment notice issued u/s 148 in a case where the original assessment was made u/s 143(1) cannot be challenged on the ground of a mere change of opinion, still it is open to an assessee to challenge the notice on the ground that there is no reason to believe that income chargeable to tax has escaped assessment. As regards the decision of Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) cited by the Revenue and relied upon by the Accountant Member, the Third Member held that the same was applicable in cases where the return was processed u/s 143(1) but later on notice was issued u/s 148 and the assessee challenges the notice on the ground that it is prompted by a mere change of opinion. The Third Member then referred to the decision of Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India (supra) wherein it was held that there should be “tangible material” to come to the conclusion that income had escaped assessment. Relying on the said decision, it was held by the Third Member that while resorting to section 147 even in a case where only an intimation had been issued u/s 143(1)(a), it is essential that the AO should have before him tangible material justifying his reason to believe that income had escaped assessment. Since there was no such tangible material before the AO from which he could entertain the belief that income of the assessee chargeable to tax had escaped assessment, the Third Member held that reassessment proceedings initiated by the AO were liable to be quashed on the ground that there was no tangible material before the AO even though the assessment was completed originally u/s 143(1). In our opinion, the Third Member decision of the Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) is squarely applicable in the present case and respectfully following the same, we hold that the initiation of reassessment proceedings by the AO itself was bad in law and the reassessment completed in pursuance thereof is liable to be quashed being invalid. We order accordingly and allow ground No.1 of the assessee’ s appeal.

9. As a result of our decision rendered above on the preliminary issue quashing/cancelling the assessment made by the AO u/s 143(3) read with section 147, the other issues raised in the appeals of the assessee and the Revenue in respect of additions made in the said assessment have become infructuous and we do not deem it necessary or expedient to decide the same.

10. In the result, the appeal of the assessee is allowed whereas the appeal of the Revenue is dismissed.

Order pronounced on this 7th day of Oct., 2011.