Reopening Tax Assessment Denied: Full Disclosure Upheld

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Case Name:

Consulting Engineering Services (India) Pvt. Ltd. vs Deputy Commissioner of Income Tax & Anr.(High Court of Delhi)

W.P.(C) 2029/2014 & CM 4235/2014

Date: 21st September 2015

Key Takeaways:

• The court emphasized the importance of full and true disclosure by the assessee in tax assessments.
• The decision highlights the limitations on the revenue’s ability to reopen assessments beyond four years unless specific conditions are met.
• The ruling reinforces the protection for taxpayers against arbitrary reassessment actions by tax authorities.

Issue

Can the tax assessment be reopened under Section 147 (of Income Tax Act, 1961) when the assessee has already made a full and true disclosure of all material facts?

Facts

• The original assessment for the assessee, Consulting Engineering Services (India) Pvt. Ltd., was completed on December 15, 2010, under Section 143(3) (of Income Tax Act, 1961).
• The assessing officer later issued a notice under Section 148 (of Income Tax Act, 1961) on March 21, 2013, seeking to reopen the assessment for the year 2007-08.
• The officer claimed that certain interest expenses should have been capitalized rather than treated as revenue expenses, and that professional fees were underreported.
• The assessee argued that all relevant facts were disclosed during the original assessment.

Arguments

• Assessee’s Argument: The assessee contended that all material facts were fully and truly disclosed during the original assessment, and the reopening was based on a mere change of opinion by the assessing officer.
• Revenue’s Argument: The revenue argued that the assessee failed to disclose certain particulars, leading to an escapement of income, justifying the reopening of the assessment.

Key Legal Precedents

• Section 147 (of Income Tax Act, 1961): This section allows for the reopening of an assessment if income has escaped assessment due to the assessee’s failure to disclose fully and truly all material facts.
• The court referred to the first proviso of Section 147 (of Income Tax Act, 1961), which restricts reopening beyond four years unless there is a failure on the part of the assessee to disclose necessary facts.

Judgement

The court ruled in favor of the assessee, setting aside the notice under Section 148 (of Income Tax Act, 1961) and the subsequent order. The court found no failure on the part of the assessee to disclose material facts, and thus, the conditions for reopening the assessment were not satisfied.

FAQs

Q1: What does this judgment mean for taxpayers?

A1: It reinforces the protection against arbitrary reassessment actions by tax authorities, emphasizing the need for a valid basis to reopen assessments.

Q2: Why was the reopening of the assessment denied?

A2: The court found that the assessee had made a full and true disclosure of all material facts, and the reopening was based on a mere change of opinion by the assessing officer.

Q3: What is the significance of Section 147 (of Income Tax Act, 1961) in this case?

A3: Section 147 (of Income Tax Act, 1961) was central to the case, as it outlines the conditions under which an assessment can be reopened. The court’s decision hinged on the interpretation of this section.

1. This writ petition is directed against the notice under section 148 (of Income Tax Act, 1961) ( hereinafter referred to as “the said Act”) issued on 21.03.2013 in respect of the Assessment Year 2007-08. It is also directed against the order dated 21.03.2014 passed by the Assessing Officer disposing the objections raised by the petitioner.

2. The assessment in respect of the petitioner’s income was completed

under section 143(3) (of Income Tax Act, 1961) on 15.12.2010. The assessing officer had made certain additions on account of section 40(a)(ia) (of Income Tax Act, 1961) ( Rs.1,55,94,534/-), under section 14A (of Income Tax Act, 1961) (Rs.1,55,603/-) and on account of extra depreciation claimed on computer peripherals (Rs. 6,87,043/-).

3. The impugned notice under section 148 (of Income Tax Act, 1961) was, as mentioned above, issued

on 21.03.2013, beyond four years from the end of the relevant Assessment

Year. Consequently, the first proviso to section 147 of the Income Tax Act, 1961 would come into play. The said proviso stipulates that no action shall be taken under section 147 (of Income Tax Act, 1961) after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to,inter alia, “disclose fully and truly all material facts necessary for his assessment” for that assessment year. It is in this context that the reasons given for reopening of the assessment have to be seen.

4. The purported reasons were as under:

“Reasons for reopening the assessment u/s 148 (of Income Tax Act, 1961) of the I-T Acting the

case of M/s Consulting Engineering Services India (P) Ltd PAN

AAACC 5110G for the A.Y. 2007-08 Return of income in this case for A.Y. 2007-08 was filed on 17.02.2009 declaring total income at Rs. 12,26,51,602/-. The return was processed u/s 143(1) (of Income Tax Act, 1961) at the returned income. Subsequently the case was selected for scrutiny and the order u/s 143(3) (of Income Tax Act, 1961) was passed on 15.12.2010

at an income of Rs. 12,64,78,500/- after the AO made additions of Rs.

1,55,94,534/- on account of disallowance u/s 40(a)(ia) (of Income Tax Act, 1961), Rs. 1,55,603/- u/s 14A (of Income Tax Act, 1961) and Rs. 6,87,043/- on account of disallowance of extra depreciation claimed on computer peripherals.

2. On perusal of records, it is noticed that the assessee co. has claimed interest expenses of Rs. 25,07,124/- on terms loans in the P&L a/c. Further, the assessee co. has shown capital work in progress (CWIP) at Rs.2,83,56,670/- for the period under consideration. However, the interest capitalized against the same has been shown at NIL. From the above, it is clear that the assessee should have been capitalized. The assessee however,claimed the same as revenue expenses instead thereby making a wrong claim. It is pertinent here to mention that similar claim of the assessee regarding the interest expenses has been disallowed by the AO amounting to Rs. 24,73,568/- for AY 2009-10.

Hence it is clear that the assessee failed to disclose the true particulars of its income on this issue and the same was not dwelled upon by the AO during the original assessment proceedings and no findings were given on this issue by the AO.

In view of the above, I have reasons to believe that taxable income to the tune Rs. 25,07,124/- has escaped assessment and I am satisfied that it is a fit case for issue of notice u/s 148 (of Income Tax Act, 1961).

3. Further, on perusal of notes to a/c in case of the assessee co., it has been reported by the auditors at sr. No. 9 that the assessee has booked the professional fees less than the Job in progress brought forward from the last year on their ultimate completion by Rs. 3,21,21,550/-. Further it is notice that the assessee follows two methods for revenue recognition for the jobs in progress:-

(a) In cases where the agreements were executed before revised AS-7, the

revenue is recognized on completed contract method.

(b) In cases where the agreements were executed after revised AS-7, the

revenue is recognized on percentage of completion method.

However, as per the part B of Audit Report u/s 44AB (of Income Tax Act, 1961) of the I-T Act, it has been mentioned that the valuation of the jobs in progress w.r.t. (a) above is limited to the realizable free for the respective jobs whereas for the jobs in progress w.r.t. (b) above the valuation is subject to agreed realized fee to the extent of value of percentage of completion of each such

4. Hence it is clear that the assessee failed to disclose the true particulars of its income on this issue and the same was not dwelled upon by the AO during the original assessment proceedings and no findings were given on this issue by the AO.

In view of the above, I have reasons to believe that taxable income on the abovementioned issues to the tune of Rs. 3,46,28,674/- has escaped

assessment and I am satisfied that it is a fit case for issue of notice u/s 148 (of Income Tax Act, 1961).”

To complete the narration of facts, we may point out that the petitioner had filed objections on 22.08.2013 and they were disposed of by the impugned order dated 21.03.2014.

5. From the purported reasons it appears that the assessing officer in the first instance had raised an issue as to whether the interest payments were to be on the revenue account or the capital account. The petitioner had claimed it as a revenue expense and that had been allowed in the original assessment proceedings. The extent of the claim was Rs. 25,07,124/-. As can be seen from paragraph 2 of the reasons, the assessing officer has done nothing but to re-examine the records which were already available and has arrived at a different conclusion in stating that the interest expenses ought to have been capitalised. This, by itself, to our mind does not amount to any failure on the

part of the assessee to disclose fully and truly all material facts necessary for his assessment. It has not been indicated as to what particulars were not disclosed by the assessee. All the relevant accounts and records were available for consideration and the assessing officer had considered the entire material and he gave a detailed assessment order running into five pages. It cannot be inferred from these facts that the petitioner had not made a full and true disclosure of the material particulars necessary for assessment.

6. With regard to the second point raised in the purported reasons, we find that the assessing officer has not even indicated the extent of the alleged escapement of income. Furthermore, the assessing officer has once again stated that on “perusal” of the notes to the accounts of the assessee and particularly the note at serial number 9 of the auditor’s report, it is seen that the assessee has booked the professional fees less than the job in progress brought forward from the last year on the ultimate completion by an amount of Rs.3,21,21,550/-. Nothing further has been indicated apart from this fact which was there on record even in the original assessment. Therefore, once again we are of the view that the allegations of the assessing officer in the purported

reasons that the assessee had failed to disclose full and true particulars of his income, is without any basis. Consequently, in view of the provisions of the first proviso of section 147 of the Income Tax Act, 1961, the revenue cannot be permitted to reopen the assessment as the necessary pre-condition for doing so in a case which is beyond four years from the end of the relevant assessment year has not been fulfilled.

7. The writ petition is allowed. The impugned notice under section 148 of the Income Tax Act, 1961 dated 21.03.2013 as also the order dated 21.03.2014 are set aside.

There shall be no orders as to costs.

BADAR DURREZ AHMED, J

SANJEEV SACHDEVA, J

SEPTEMBER 21,2015