IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “G” NEW DELHI
BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER
AND
SHRIA.T. VARKEY: JUDICIAL MEMBER

ITA No. 5263/Del/2012
Asstt. Yr: 2004-05

ACIT, Circle 9(1), ( Appellant )  Vs. Super Cassettes Industries Ltd.Noida (Respondent)
Date of hearing : 19/05/2015. Date of order : 08/07/2015.

ORDER

PER S.V. MEHROTRA, A.M:
This appeal, preferred by the revenue, is directed against CIT(A)’s order dated 11-07-2012 relating to A.Y. 2004-05. Following grounds are raised:

“1. The Ld. CIT(A) erred in law and on facts by quashing reassessment under section 147/148 of the Act as the failure is on part of the assessee to disclose truly and fully all material facts.

2. The Ld. CIT(A) erred on the facts and circumstances of the case and law in deleting the addition on account of repair and maintenance, building expenses and design and Act work expenses amounting to Rs. 45,51,661/-.

3. The appellant craves leave to amend, modify, alter, add or forego any ground of appeal at any time before or during the hearing of this appeal.”

2. The assessee company, for AY 2004-05, filed its return of income declaring income of Rs. 10,40,11,590/- on 1-11-2004. The assessment was completed u/s 143(3) on 22-3-2005. Thereafter, AO issued notice u/s 148 on 23-3-2011 after recording following reasons:

“During the year, the assessee company has shown an amount of Rs. 4,13,61,284/- as “Unsecured loans from Directors” in schedule 4 of the balance sheet whereas as per Annexure I-1 to Form 3CD of the Audit Report, the “Outstanding unsecured loan against the Directors” was shown at Rs. 17,765,66,492/-. This shows that the assessee has not accounted “Unsecured loan worth Rs. 13,63,05,208/- in the books of accounts.

Further, the assessee ahs also debited Rs. 53,64,710/- & Rs. 12,92,529/- in the Profit and Loss Account in respect of “Repairs of Machinery and Building & Purchase of Capital items” and “Design and Art Work” respectively. These expenditures were in the nature of capital which is not allowable as per the provisions of the Act. Therefore, the same should have been disallowed and added to the income of the assessee.”

3. The assessee vide its letter dated 14-4-2011 submitted that the return filed on 1-11-2004 may be treated as return of income in response to notice u/s 148. Assessee further requested for reasons recorded for reopening the assessment, which were also provided to it. The AO, subsequently issued notice u/s 142(1) and completed the assessment making addition of Rs. 45,51,667/- by treating the expenditure incurred on account of design and art work and expenditure incurred on repairs of machinery and building aggregating to Rs. 66,57,239/- as capital expenditure. Since in the original assessment, AO had disallowed an amount of Rs. 5,88,350/-, the AO made the impugned addition after allowing 25% depreciation on addition of Rs. 60,68,889/-.

4. Before ld. CIT(A) the assessee assailed the reassessment proceedings initiated u/s 147 read with section 148 as being without jurisdiction and bad in law. Ld. CIT(A), after consideration of detailed submissions advanced by ld. counsel for the assessee, quashed the reassessment proceedings, mainly for following reasons:

(a) Reassessment proceedings were initiated after the expiry of four years. Therefore, in view of proviso to section 147, since there was no failure on the part of the assessee to disclose fully and truly all material facts, necessary for its assessment, no reopening could be done.

(b) The reasons were based on form 3CD and not on any new material. Since the assessment was completed u/s 143(3), therefore, it was a case of change of opinion particularly because the assessee at the time of original assessment proceedings had given detailed reply to

the questionnaire and order-sheet entries by the AO.

(c) The AO summarily rejected the objections raised by assessee to the reasons recorded which is against the principle laid down by Hon’ble Supreme Court in the case of GKN Driveshaft Ltd. 259 ITR 90

5. We have considered the rival submissions and have perused the record of the case. Admittedly, the reopening has been done after four years from the end of the relevant assessment year and, therefore, the proviso to section 147 was attracted. In view of this proviso, unless there was failure on the part of the assessee to disclose fully and truly all material facts, necessary for assessment, no reopening could be done. A bare perusal of the reasons recorded by AO makes it evident that the reopening has been done, firstly, on the basis of alleged difference between the unsecured loans from directors in schedule 4 of the balance-sheet as against details as per Annexure I-1 to form 3CD of the audit report. Secondly, the AO reopened the assessment considering the repairs to machinery and building and purchase of capital items and design and art work as capital expenditure. Thus, 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 Rs. 17,76,66,492/-, whereas in the balance-sheet it was Rs. 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).

6. Now coming to the issue regarding treating the “repairs of machinery and building & purchase of capital items” and “design and art work”, purely as capital expenditure, we find 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 Rs. 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. 320 ITR 56, wherein it has been held as under:

"On going through the changes, quoted above, made to s. 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, reopening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the AO to make a back assessment, but ins. 147 of the Act (w.e.f. Ist April, 1989), ~y are given a go-by and only one condition has remained, viz., that where the AD has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post- 1st April, 1989 power to reopen is much wider. However, one needs to give schematic interpretation to the words 'reason to believe' failing which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of 'mere change of opinion " which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has got power to reassess. Bur reassessment has to be based on fulfillment of certain precondition and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an inbuilt test to check abuse of power by the AO"

8. Further, we are in agreement with ld. CIT(A) that in view of the decision of Hon’ble Supreme Court, in the case of GKN Driveshaft Ltd. (supra), the AO was required to dispose of the assessee’s objections to the reasons recorded by passing a reasoned order and not summarily rejecting the same without any specific finding. On this basis reassessment proceedings could not be quashed but the mater could be restored to the file of AO. However, since we find that the reasons recorded do not meet the mandate of proviso to section 147 and are purely on the basis of change of opinion, therefore, the reasons recorded by AO cannot be sustained in law. In view of above discussion, we uphold the order of ld. CIT(A). 9. In the result, department’s appeal is dismissed.

Order pronounced in open court on 08-07-2015

Sd/-                                                      Sd/-
(A.T. VARKEY)                        ( S.V. MEHROTRA )
JUDICIAL MEMBER                ACCOUNTANT MEMBER
Dated: 08-07-2015.