Madhya Gujarat Vij Company Ltd., Vadodara V. The Dy. Commissioner of Income Tax, Circle-2, Vadodara

ITA 182/AHD/2017

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Madhya Gujarat Vij Company Ltd. appealed against the order of the Commissioner of Income Tax (Appeals)-2, Vadodara, which confirmed the disallowance of prior period expenses amounting to Rs. 16,02,98,000. The expenses were initially claimed in the return of income for the assessment year 2008-09 but were disallowed during reassessment proceedings initiated under section 147 of the Income Tax Act, 1961. The Tribunal examined whether the reassessment was valid, considering it was initiated beyond the four-year period from the end of the relevant assessment year. The Tribunal concluded that the reassessment was based on a change of opinion rather than new material facts, leading to the setting aside of the reassessment proceedings.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131458 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 15-01-2023
• Assessment Year: 2008-2009
• Appeal Filed On: 19-01-2017
• Other Referred Cases: Jivraj Tea Company Vs. ACIT, Gala Gymkhana Pvt. Ltd. Vs. ACIT, U.P. State Bridge Corporation Ltd, Santech Solutions (P.) Ltd, Revolution Forver Marketing (P.) Ltd., Foramer France, New Delhi Television Ltd., ICICI Securities Primary Dealership Ltd., Azim Premji Trustee Company (P.) Ltd., Godrej & Boyce Mfg. Co. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Reopening of assessment; Gift; Depreciation; Difference of opinion; Tax effect; Change of opinion; Reassessment proceedings
• Section: 148; 143(3); 234B; 115JB; 72

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH Before: Ms. Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Madhy a Gujarat Vij Co mpany Ltd. , Sardar Patel Vidyut Bhavan, Race Cou rse Circle, Vadodara-3 90007 PAN: AADCM743 9H (Appellant) Vs DCIT, Circle-2, Aaykar Bhavan, Race Course Ro ad, Vadodara-3900 07 (Resp ondent) Asses see b y : Shri M. K. Patel, A. R. Revenue by : Shri S udhendu Das, CIT-D. R. Date of hearing : 16-01 -2 023 Date of pronouncement : 03-03 -2 023 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-2, Vadodara in Appeal no. CAB/(A)-2/227/15-16, in proceeding u/s. 143(3) r.w.s. 147 vide order dated 31/10/2016 passed for the assessment year 2008-09. ITA No. 182/Ahd/2017 Assessment Year 2008-09 I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 2 2. The assessee has raised the following grounds of appeal:- “1.0 The learned Commissioner of Income Tax (Appeals) erred in law and facts has confirmed the disallowance of the prior period expense 16,02,98,000/- treating the same as expenditure of earlier years without understanding the fact that the same has been booked as expenditure only due to the reversal of entry of earlier years where the same was shown as income. 2.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 271(l)(c) of the I T Act. 3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234B of the Income Tax Act, 1961. 4.0 The appellant craves leave to add to, alter, delete or modify the ground of appeal either before or at the time of hearing of this appeal.” 3. The assessee has also raised the following grounds of appeal:- “1. That the learned Commissioner of Income-tax (Appeals) has grievously erred in law and on facts in not holding that the re-opening of assessment is invalid and void ab-initio. 2. That, on facts and in law it ought to have been held that since original assessment is u/s. 143(3), re-opening beyond four years from end of relevant A.Y. is time-barred and not permissible in law.” I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 3 4. Before us, at the outset, the counsel for the assessee has challenged the validity of reassessment proceedings on the ground that the re- assessment proceedings were initiated after four year from the end of the relevant assessment year and the same are time barred and not valid under law. The counsel for the assessee submitted that in the instant facts the order passed u/s. 147 of the Act is not sustainable since there is no material on record with the Department to the effect that the disclosure made by the assessee during the during the course of assessment proceedings was either incomplete or untrue or that there was failure on the part of the assessee in disclosing material facts at the time of original assessment. In response, the ld. Departmental Representative relied on the observations made by ld. CIT(A) in the appellate order. 4.1 The facts pertaining to the issue of challenge to jurisdiction of initiating proceedings u/s. 147 of the Act are that the assessee company filed its return of income on 30-09-2008 declaring loss of Rs. 12,85,67,801/-. The original assessment u/s. 143(3) of the Act was completed on 30-12-2010 after determining total loss of Rs. 5,06,04,324/-. Subsequently, the Assessing Officer noticed that certain expenses pertaining to prior period i.e. prior period expenses had been incorrectly claimed by the assessee in the return of income and the Ld. Assessing Officer issued notice u/s. 148 of the Act on 18-03-2015 after recording reasons. The Assessing Officer recorded the following reasons while initiating re-assessment proceedings:- “ANNEXURE AS PER COLUMN 10 OF PROFORMA I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 4 The assessee company filed its return of income for A.Y.2008- 09 on 30.09.2008 declaring total loss of Rs. 12,85,67,801/- (under normal provision) which was assessed u/s. 143(3) on 30.12.2010 determining total loss of Rs.5,06,04,324/- (under normal provision) Book Profit u/s 115JB was determined at Rs. 2,77,73,370/- and tax liability was determined under MAT and income of Rs. 2,77,73,370/- under NAT & tax was paid under MAT. The assessee was engaged in distribution of electricity. The assessee had employed the mercantile system of accounting, but it was observed from the record that the assessee has claimed prior period expenses in its P&I account which amounts to Rs. 3196.37 lakhs. Since, the assessee had employed mercantile system of accounting, prior period expenses were not allowable expenses. The scrutiny of assessment records, P&L account revealed that an amount of Rs. 3327.35 lakhs was debited to P & L account as net prior period expenses (though the accountant has mentioned in clause 22(b) of 3CD report of net prior period expenses as Rs. 3196.37 lakhs (Schedule G-Annexure to clause 22(b) of 3CD). However, it was noticed that the assessee itself added back in computation of income an amount of Rs.1724.37 lakhs only instead of Rs.3327.35 lakhs resulting into under assessment of income of Rs.1602.98 lakhs (3377.35 lakhs 1724.37 lakhs) which resulted into potential tax effect of Rs. 544.5 lakhs” I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 5 Therefore, in view of the above, I have reason to believe that the assessee did not reflect true and correct state of affair. Hence, income of more than 1 lac had escaped assessment for this year.” During the re-assessment proceedings, the Assessing Officer after taking the submissions of the assessee on record, made an addition of Rs. 16,02,98,000/- on account of prior period expenses being claimed by the assessee during the impugned assessment year. 4.2 The assessee filed appeal against the aforesaid order before ld. CIT(A) and submitted Firstly, that all payments and expenses were specifically and categorically disclosed in the audited annual accounts as well as tax audit report of the company for the year under consideration. Secondly, the issue relating to prior period expenses was discussed and verified during the course of assessment proceedings u/s. 143(3) of the Act. The assessee submitted before us that vide letter dated 03-12-2012 the necessary details relating to prior period expenses were submitted by the assessee before the Assessing Officer during the course of original assessment proceedings. Thirdly, all materials necessary for completing assessment were submitted at the time of assessment u/s. 143(3) of the Act and were already on record and no new facts had come to the notice of the Assessing Officer. Accordingly, in the instant facts, the proceedings u/s. 147 of the Act are liable to be dropped since the re-assessment proceedings have been initiated on a mere “change of opinion”. However, ld. CIT(A) dismissed the challenge of the assessee to initiation of re-assessment proceedings u/s. 147 of the Act with the following observations:- I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 6 “From the perusal of above reply, it is clear that appellant had not furnished complete details of prior period expenses. Further, no documentary evidences were also furnished to establish that the prior period expenses were actually crystallized during the year under consideration. Therefore, it is clear that full and true disclosure of all material facts was not made by the appellant during the course of original assessment proceedings. To is also noted that reopening u/s. 148 was not separately objected by the appellant except in a written submission filed on merits also. Accordingly, the objections have been rejected while making addition in assessment order by the Assessing Officer. The copy of assessment order passed originally on 30.12.2010 also does not reflected formation of the opinion by the then Assessing Officer in respect of allowability of prior period expenses or otherwise. It is an established legal position that unless an opinion was formed by the Assessing Officer on a particular issue, the question of "change of opinion does not arise. The Hon'ble jurisdictional High Court in the case of Jivraj Tea Company Vs. ACIT (2016) 68 taxmann.com 105 (Guj.) has held that when there was no enquiry and/or application of mind with respect to a particular issue (interest free loan to the partners in that case) and the Assessing Officer did not address himself in respect to that issue while framing original assessment order, it cannot be said that reopening was a mere "change of opinion. Similarly, in another case of Gala Gymkhana Pvt. Ltd. Vs. ACIT (2012) 27 taxmann.com 294 (Guj.), the Hon'ble High Court has held that when the Assessing Officer simply called for the details of membership fees etc and question of taxability I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 7 of such receipt was not examined by him during the course of original assessment proceedings, it cannot be said that the Assessing Officer had formed an opinion with regard to non-taxability of such receipt and therefore, such receipt can be taxed subsequently by Issue of notice u/s. 148. In view of the above discussion and legal position, thus, 1 am of the considered view, that the Assessing Officer has rightly issued notice u/s. 148 and hence Ground No. 1 is dismissed.” 5. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(A). Before us, the counsel for the assessee submitted that in the instant case proceedings u/s. 147 of the Act were initiated after four years from the end of the assessment year and it is a settled law that if assessment has been completed u/s. 143(3) then no further action can be taken u/s. 147 after expiry of four years from the end of relevant assessment year unless income chargeable to tax has escaped assessment due to failure on assessee’s part in fully and truly disclosing the material facts required for the assessment. In the instant case, the assessee had truly and fully disclosed all material facts relating to the assessment. Further, the ld. Assessing Officer had made due inquiries on this aspect during the course of assessment proceedings and further no fresh material had come in the possession of the Assessing Officer which could form the basis of initiation of proceedings u/s. 147 of the Act beyond the period of four years from the end of the relevant assessment year. Further, on merits, the counsel for the assessee submitted that it has been a consistent practice of the assessee company in accounting both prior period expenses and prior period income and the same is a revenue neutral exercise. Further, the counsel for the assessee submitted I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 8 that the Department on one hand has taxed the prior period income in the current year i.e. income pertaining to prior year, but on the other hand, prior period expenses have been disallowed and added back to the income of the assessee. Therefore, the Department is taking inconsistent position on taxability of prior period income and expenses for the same assessment year. 6. In response, the ld. Departmental Representative relied upon the observations made by the ld. CIT(A) in the appellate order. 7. We have heard the rival contentions and perused the material on record. In the instant case, the original assessment was completed on 30-12- 2010 and notice for initiating proceedings u/s. 147 of the Act was issued on 18-03-2015 which is admittedly beyond a period of four years from the end of the assessment year. It would be useful to reproduce the relevant extracts of the 147 notice which reads as under:- “On perusal of the records for the year under consideration, it is noticed that you have followed mercantile system of accounting and you have claimed prior period expenses in its P&L account of Ra 3196.37 lacs, which is not allowable as per Income tax Act. Further, it is observed that an amount of Rs. 3327.37 lace was debited to P&L as net prior period expenses (though the accountant has mentioned in clause 22(b) of 3CD report of net prior period expenses as Rs. 3195.37 lacs). However, it was seen that the assessee itself added back Rs. 1724.37 lace only in the computation of income instead of I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 9 Rs. 3397.35 lacs. Therefore, there is under assessment of Rs. 1602.98 lacs (i.e. 3387.35 lacs minus Rs. 1724.37 lacs. In view of the above, please show cause as to why Rs. 1602.98 lacs should not be added to your total income.” 7.1 A perusal of the show cause notice shows that evidently nothing on record has been placed on record by the Department to establish that there was any failure on the part of the assessee to disclose fully and truly all materials facts necessary for assessment for the assessment year under consideration. The Department has initiated proceedings only on the basis of material available on record i.e. the profit and loss account of the company and clause 22(b) of form 3CD (tax audit report) and the computation of income filed with the original return of income. The entire basis of initiating reassessment proceedings is that the assessee has claimed prior period expenses in the return of income which are not allowable under the Act. However, we observe that the assessee already added back a sum of Rs. 7.24 crores as prior period expenses in the computation of income filed with the return of income. Further, Schedule 29 of the Profit and Loss Account for the year ended 31 st March, 2008 explicitly shows that the assessee has claimed “net prior period expenses of Rs. 3327.35 lakhs during the year under consideration. Notably, in the immediately preceding year, the assessee had claimed similar prior period expenses to the tune of Rs. 156.37 lakhs as well. Therefore, we observe in the instant facts that the only reason for reopening the assessment of the assessee was view a view to disallow prior period expenses claimed during the year under consideration. I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 10 The Department, in our considered view has not brought forth any material on record to show that there was any failure on the part of the assessee to disclose fully and truly all materials facts necessary for his assessment, which is a pre-requisite for initiating proceedings beyond the period of four years from the end of the relevant assessment year. This is evident from the SCN issued by the Ld. Assessing Officer for making additions u/s 147 of the Act. Further, as pointed out by the counsel for the assessee relevant queries were made on this aspect during the course of assessment proceedings and the assessee had also replied thereto by way of a letter dated 03-02-2010. Therefore, in our considered view, the instant proceedings have been reopened by way of a “change in opinion” since no fresh material or information has been brought on record by the Ld. Assessing Officer to show that there has been escapement of income due to failure on part of the assessee to truly and fully disclose all material facts. The reassessment proceedings in our view have been initiated only on re-appreciation of same documents which were available with the Ld. Assessing Officer at the time of original assessment. Further, there is no allegation in either the “reasons recorded” or the SCN issued initiating 147 proceedings that there has been failure on part of the assessee to make full and true disclosures during the course of original assessment proceedings. In the case of U.P. State Bridge Corporation Ltd [2019] 110 taxmann.com 377 (Allahabad), the High Court held that where AO initiated reassessment proceedings on ground that assessee had claimed excessive depreciation on shuttering and mining equipments, in view of fact that assessee had disclosed full and correct facts relating to claim of depreciation merely on basis of change of opinion, deserved to be quashed. In the case of Santech Solutions (P.) Ltd [2018] 97 I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 11 taxmann.com 179 (Madras), the Assessing Officer completed original assessment of assessee under section 143(3) of the Act. Later Assessing Officer having noticed that an advance of Rs. 1.05 crores received by assessee had not been credited to profit and loss account but to software development account and income on software development had not been offered on accrual basis, reopened assessment of assessee. The Tribunal held that Assessing Officer while framing original assessment was aware of recovery of said amount and when there was no fresh material available with Assessing Officer for harbouring a doubt that income had escaped assessment, reopening of assessment was purely based on change of opinion. In the case of Revolution Forver Marketing (P.) Ltd. [2019] 104 taxmann.com 61 (Delhi), the High Court held that where assessee was engaged in multi-level marketing business model and Assessing Officer framed assessment of assessee under section 143(3) and subsequently he reopened said assessment for reason that substantial cash transactions were carried out with banks, which were not verified, since duty of assessee was to disclose bank statements for relevant year, which it did, reason for assessment was vague and unjustified. In the case of Foramer France [2003] 129 Taxman 72 (SC), the petitioner-foreign company was engaged in business of oil exploration and providing expertise and assistance in said field. Proceeds from manning and management contracts received by petitioner were originally assessed in February, 1991 under section 143(3) treating same as business income in terms of section 44BB. However, following Tribunal's decision rendered in case of petitioner's expatriate employee, Assessing Officer issued a notice under section 148 in November, 1998 seeking to reassess same income as fees for technical services. The I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 12 Hon'ble Supreme Court held that since admittedly there was no failure on part of petitioner to make return or to disclose fully and truly all material facts necessary for assessment, proviso to new section, which bars issue of notice under section 148 after expiry of four years from end of relevant assessment year, squarely applied to facts of instant case and, therefore, impugned notice was barred by limitation. Therefore, since notice under section 148 was without jurisdiction, there was no merit in plea that petitioner was to be relegated to alternative remedy. In the case of New Delhi Television Ltd. [2020] 116 taxmann.com 151 (SC), the Hon'ble Supreme Court held that where Assessing Officer issued notice to reopen assessment in case of assessee taking a view that funds raised by its subsidiary company by issue of Step UP Coupon Bonds represented its own unaccounted money, however, failed to show non-disclosure of material facts by assessee, notice issued to assessee after a period of 4 years was to be quashed and set aside. In the case of ICICI Securities Primary Dealership Ltd. [2012] 24 taxmann.com 310 (SC), the Assessing Officer completed assessment of assessee under section 143(3) after taking into consideration account furnished by assessee. After lapse of four years from relevant assessment year Assessing Officer reopened assessment of assessee on ground that during relevant year assessee company had incurred a loss in trading in share, which was a speculative one and therefore chargeable to tax. Accordingly, the Ld. Assessing Officer passed order under section 147 of the Act. The Hon'ble Supreme Court held that since after a mere re-look of accounts which were earlier furnished by assessee, Assessing Officer had come to conclusion that income had escaped assessment, same was not permissible under section 147 as it was clearly a I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 13 change of opinion. Therefore, order re-opining assessment was not permissible. In the case of Azim Premji Trustee Company (P.) Ltd. [2022] 141 taxmann.com 451 (Karnataka), the High Court held that where impugned notice under section 148 was issued to assessee alleging escapement of income on ground that shares received by assessee as a gift were disclosed, but neither book value nor market value of shares was disclosed in Balance Sheet, however, fact that all material facts necessary for assessment were disclosed and market value of share was clearly discernible from returns and documents, mere non-mentioning of market value of shares was neither relevant nor germane for purpose of invoking proviso to section 147 and consequently, impugned notice and reasons deserved to be quashed. In the case of Godrej & Boyce Mfg. Co. Ltd. [2022] 140 taxmann.com 345 (Bombay), the High Court held that where Assessing Officer completed original assessment under section 143(3) and subsequently he issued notice seeking to reopen such assessment for reason that interest bearing funds had been used for making addition of capital work-in-progress and hence interest paid in respect of capital borrowed for addition to capital work-in-progress should have been added back and capitalized as per provisions of section 36(1)(iii), as reasons did not indicate that there was failure to disclose truly and fully all material facts, impugned notice deserved to be quashed. Accordingly, in view of our observations in the preceding paragraphs and in light of the above judicial precedents highlighted above, we are hereby directing that the present reassessment proceedings are liable to be set aside. Since, we are quashing the notice issued u/s 147 of the Act on grounds of jurisdiction I.T.A No. 182/Ahd/2017 A.Y. 2008-09 Page No. Madhya Gujarat Vij Company Ltd. vs. Dy. CIT 14 itself, we are not separately adjudicating on other Grounds of Appeal filed by the assessee. 8. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 03-03-2023 Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : (Dated 03/03/2023 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद