IN THE INCOME-TAX APPELLATE TRIBUNAL
CHENNAI 'C' BENCH, CHENNAI.
Before Shri.U.B.S. Bedi, J.M. & Shri. Abraham P. George, A.M.
I.T.A. Nos.1545 and 1546/Mds/2010
Assessment Years: 2000-01 and 01-02
The Deputy Commissioner of M/s. I P Rings Ltd., Income Tax, Vs. "Arjay Apex Centre", No.24, Company Circle II (3), 121, College Road, Chennai 600 006. M.G. Road, Chennai - 34.
(Appellant) (Respondent) Revenue by : Shri Clement Ramesh Kumar
Assessee by Shri R. Vijayaraghavan &
Shri Saroj Kumar Parida
PER U.B.S. Bedi, J.M.
These two appeals of the Department are directed against separate
orders passed by the ld. CIT(A) III, Chennai both dated 28.06.2010 relevant to
the assessment years 2000-01 and 2001-02 respectively.
2. These appeals pertain to same assessee, involve identical facts and
similar issues, therefore being disposed off by this single order for the sake of
3. We shall discuss facts for the assessment year 2000-01 in appeal
No.1545/Mds/2010, which in brief are that the assessee is engaged in the
business of manufacturing and sale of piston rings. It filed its return of income
on 28.11.2000 declaring a total income of Rs.2,07,22,840/-. The assessment
was completed under section 143(3) on 11.03.2003 determining total income at
Rs.214,43,710/-. The assessee has paid a sum of `.58,93,677/- as royalty to 2 I.T.A. Nos.1545 & 1546/Mds/10
M/s. Nippon Piston Ring Co. Ltd., Japan, under an agreement entered into with
the Japanese company. The assessee claimed deduction of royalty payments
as revenue expenditure. The Assessing Officer issued notice under section 148
on 29.03.2007 and thereafter passed an order under section 143(3) r.w.s. 147
dated 17.09.2007 determining the taxable income at Rs.2,58,36,878/-. While
completing the reassessment, the Assessing Officer treated the royalty
expenses as capital in nature and disallowed expenditure amounting to
Rs.44,20,258/-, which is after allowing a depreciation of 25% i.e. Rs.58,93,677/-
4. Aggrieved by the order of the Assessing Officer, the assessee took up
the matter in appeal and besides challenging the impugned disallowance, the
assessee has also challenged the reopening of the assessment.
5. With regard to reopening of the assessment beyond 4 years, the ld. AR
of the assessee submitted before the first appellate authority as under:
"It is submitted that during the course of regular assessment u/s. 143(3), assessing office vide his letter dated 17.02.2003 called for the following particulars:
"In continuation of your assessment proceedings for the above assessment year, you are requested to furnish further details mentioned below:
In your books of accounts you have shown Marketing Service fees of Rs.96,18,283/- and Rs.23,55,215/- as Technical knowhow fee written off u/s 32.B. You have also claimed royalty to the tune of Rs.55,61,159/-. Please furnish the details in relation to the above:
a. Agreement for the same.
b. To whom it was paid
c. Mode of payment
d. What connection it was paid."
3 I.T.A. Nos.1545 & 1546/Mds/10
In response to the above letter, the appellant filed its reply vide its letter dt. February 18, 2003. The assessing officer after considering the reply accepted the claim of the appellant. Now, the assessing officer cannot reopen the assessment to disallow the same expenses. Notice u/s. 148 issued on 29.03.2007 is beyond four years and barred by limitation and is also on the mere change of opinion.
The appellant submits that reopening beyond four years cannot be sustained in view of the fact that there was no concealment or furnishing of false or inaccurate particulars by the Appellant. As such the assessing officer has considered all these issues and has formed an opinion not to make any addition / disallowance as made in the reassessment. However, he has reopened merely on the basis of change of opinion, which is unsustainable.
The appellant relies on the following decisions:
CIT vs. TDFC 306 ITR 136 (Mad)
CIT vs. Abdul Rahman Sait 306 ITR 142 (Mad)
CIT vs. Annamalai Finance 275 ITR 451 (Mad)
CIT vs. Elgi Finance 286 ITR 674 (Mad)
CIT vs. Mookambikai Spg. Mills TC(A)No. 2611/06 dt. 27.11.2006 (Mad) CIT vs. Kelvinator of India Ltd. 256 ITR 1 (Del) Mercury Travels Ltd. vs. CIT 258 ITR 533 (Cal)
CIT vs. Indian Overseas Bank Ltd. 252 ITR 640 (Mad) CIT vs. Siva Traders 255 ITR 77 (Ker)
CIT vs. Fenner India Ltd. 241 ITR 672 (Mad)
CIT vs. Froamer France 264 ITR 566 (SC)."
6. The ld. CIT(A), while considering and allowing the appeal of the
assessee on the very first issue of reopening has noted that since the
reopening of the assessment has already been held to be invalid, the issue
become academic and did not decide the issue on merits as per para 4.1, which
reads as under:
4.1 I have carefully considered the facts of the case and submissions of the Id. AR. I have also gone through the decisions relied on by the AO and AR. The ld. AR has explained that during the scrutiny proceedings, the AO had called for the details in respect of the royalty expenses claimed as revenue expenditure. The details were duly furnished and after considering the same, the contention of the appellant was accepted by the AO. It is seen from the details that the return of the 4 I.T.A. Nos.1545 & 1546/Mds/10
appellant for the year under consideration was subjected to scrutiny assessment u/s 143(3). Various details were called for by the AO before completing the regular assessment. It is found that the AO had issued a questionnaire on 17.02.2003 and had called for the particulars of various expenditure including royalty expenses of Rs.55,61,159/· which had been claimed as revenue expenditure. The appellant vide its reply dated 18.02.2003 had given its reply and enclosed copy of agreement and approval of RBI. The assessment was completed without making any addition after considering the details filed by the assessee during the scrutiny proceedings. Considered against the above factual background, I am of the opinion that the ratio of the jurisdictional High Court in the case of CIT v. Cholamandalam Investment and Finance Company. Ltd. [309 ITR 110 (Mad)] is applicable to the case of the appellant. In that case, the AO while making the original assessment had called for the basic details regarding two purchases. The invoices and lease agreements furnished by the assessee were compared with invoices, delivery notes/challans, lease agreement and other details submitted by the lessees / suppliers. Depreciation was granted. Reassessment proceedings were taken after four years to withdraw the depreciation. The Tribunal held that the reassessment proceedings were not valid. On appeal to the High Court, it was held, dismissing the appeal, that as the assessee had furnished the invoices for purchase of assets on which 100% depreciation was claimed, there was no failure on the part of the assessee to disclose material facts necessary for assessment. The reassessment proceedings were not valid. Here also, the AO has obtained the details regarding claim of royalty expenditure, examined the same and allowed it. Subsequently, he has disallowed the same in reassessment proceedings. This is not valid as per the above decision. Further, as the details pertaining to royalty expenditure were already submitted by the appellant in the original assessment proceedings u/s 143(3), the re-assessment proceedings have been initiated on mere change of opinion and would amount to review of the earlier assessment which is not permissible. This view is supported by the decision of Hon'ble Supreme Court in the case of CIT, Delhi v. M/s Kelvinator of India Limited (2010-TIOL-06-SC-IT-LB) where it was held that the AO can reopen the assessment only if there is "tangible material" to come to the conclusion that there is escapement of income and not on change of opinion. Also, the AO has no power to review and has the power to only re-assess. In view of the above factual position and authoritative precedents, I am of the considered opinion that the re-assessment proceedings were not valid. Accordingly, the ground of appeal is allowed.
5 I.T.A. Nos.1545 & 1546/Mds/10
7. Aggrieved by the order of the ld. CIT(A), the Department has come up in
appeal and it was submitted that the ld. CIT(A) has erred in allowing the appeal
of the assessee on the ground that the reopening of the case by the Assessing
Officer beyond four years is without jurisdiction and not deciding the case on
merit. The ld. CIT(A) ought to have seen that the assessee has not raised the
validity of jurisdiction before the assessing officer during the course of
assessment and therefore there was no occasion for the assessing officer to
adjudicate on the issue and noted that the grant to the assessee of an exclusive
license to manufacture the products of M/s. Nippo Piston Ring Co. Ltd., Japan
tantamount to a royalty transaction between the assessee and the Japanese
company. Further, the ld. CIT(A) ought to have seen that the omission to treat
royalty payment as capital in nature in the original assessment proceedings
resulted in the income chargeable to tax being under-assessed. Moreover, the
ld. CIT(A) has failed to appreciate that the Explanation 2 to section 147 makes it
clear that where assessment has been made but income chargeable to tax has
been under-assessed or such income has been made the subject of excessive
relief or excessive loss or depreciation allowance has been computed, it is
deemed to be a case where income chargeable to tax has escaped
assessment. The learned CIT(A) ought to have seen that since the assessee
has claimed the above payment as revenue expenditure, which is to be
disallowed the case was re-opened u/s.148. In this regard it is stated that as per
explanation 1 to section 147, production before the assessing officer of account
books or other evidence from which material evidence could with due diligence 6 I.T.A. Nos.1545 & 1546/Mds/10
have been discovered by the Assessing Officer will not necessarily amount to
disclosure. The ld. DR, while relying upon the order of the Assessing Officer
and elaborating the grounds of appeal in his argument has pleaded that in the
assessment order passed under section 143(3) on 11.03.2003, the issue in
relation to royalty payment having been treated as revenue expenditure has not
been considered or touched upon by the Assessing Officer. So, it cannot be
said that the Assessing Officer formed opinion while making the assessment
under section 143(3). Therefore, the Assessing Officer is very much justified in
initiating the reassessment proceedings within the period of 6 years from the
end of the assessment year and to pass reassessment order and the action of
the ld. CIT(A) in holding that the initiation of reassessment proceedings is
without jurisdiction and bad in law is not sustainable. Therefore, the order of the
ld. CIT(A) should be reversed by holding that the initiation of reassessment
proceedings is valid in law. So far as addition/disallowance on merits is
concerned, the matter can go back to the ld. CIT(A) for adjudication as he has
declined to adjudicate the same.
8. The ld. Counsel for the assessee, while relying upon the basis and
reasoning as given by the ld. CIT(A) has pleaded for confirmation of the
impugned order. It was further submitted that since before passing the original
order of assessment, the Assessing Officer stated that in the books of accounts
of the assessee, the assessee is stated to have shown marketing services fees
of Rs.96,18,283/- and Rs.23,55,215/- as technical knowhow fees written off
under section 35AB. He has also stated to have claimed royalty to the tune of 7 I.T.A. Nos.1545 & 1546/Mds/10
Rs.55,62,159/- and asked the assessee to furnish details in relation to
agreement for the same, to whom it was paid, mode of payment and in what
connection it was paid, besides asking for sales tax collected and paid to which
the assessee discussed details about royalty and technical consultancy fee vide
its letter dated 18.02.2003. So, it cannot be said that this issue was not raked
up or discussed before admitting the claim of the assessee. So, there was no
occasion for the Assessing Officer to initiate reassessment proceedings with
respect to the item which were enquired into by the Assessing Officer and
replied by the assessee, because this would amount to change of opinion,
which beyond 4 years from the end of the assessment year is not permissible
and in this case, reassessment proceedings was initiated beyond 4 years. As
such, the ld. CIT(A) is very much justified in holding that such initiation of
reassessment proceedings is bad in law, whose action is being legally valid and
to be upheld. Reliance in this regard was placed in the case of CIT v. Kelvinator
of India Ltd.  320 ITR 561 (SC) and Hon'ble Jurisdictional High Court in
the case of ACIT v. M/s. Sri Mookambigai Spinning Mills Ltd. in T.C.(A) No.
2611 of 2006 dated 27.11.2006 and further reliance was placed on
Barmatics v. DCIT in ITA Nos. 1472 & 1473/Bang/2002 CIT v. Premier Mills 296 ITR 157 (Mad)
CIT vs. Elgi Finance 286 ITR 674 (Mad)
Mercury Travels Ltd. vs. CIT 258 ITR 533 (Cal)
CIT vs. Indian Overseas Bank Ltd. 252 ITR 640 (Mad) CIT vs. Siva Traders 255 ITR 77 (Ker)
CIT vs. Fenner India Ltd. 241 ITR 672 (Mad)
CIT vs. Froamer France 264 ITR 566 (SC)
CIT v. T.N. Transport Develop Finance Corpn. Ltd. 306 ITR 136 (Mad) 8 I.T.A. Nos.1545 & 1546/Mds/10
9. With regard to appeal in ITA No. 1546/Mds/2010 for the assessment
year 2001-02, it is common ground of both the sides that the issue involved and
facts are identical with difference of dates and amount, therefore, decision to be
taken for the assessment year 2000-01 may be adopted and applied here.
10. We have heard both the sides, considered the material on record as well
as precedent relied upon and find that the assessee is in the business of
manufacturing and sale of piston rings, declaring total income of
Rs.2,07,22,840/- for the assessment year 2000-01 and assessment was
completed under section 143(3) on 11.03.2003 at Rs.2,14,43,710/-. The
assessee is found to have paid a sum of Rs.58,93,677/- as royalty payment to
M/s. Nippon Piston Ring Co. Ltd., Japan under an agreement entered into with
Japanese company. The assessee stated to have claimed deduction of royalty
payment as revenue expenditure, which came to be allowed. Thereafter, the
Assessing Officer issued notice under section 148 on 29.03.2007 after
recording reasons and passed reassessment order under section 143(3) r.w.s.
147 dated 17.09.2007 determining taxable income of Rs.2,58,37,878/- after
treating the royalty expenses as capital in nature and disallowed the
expenditure in this regard to the extent of Rs.44,20,258/- after allowing 25% as
depreciation of such expenditure against which, the assessee preferred appeal
and the ld. CIT(A) concluded to treat the reassessment proceedings to be not
valid and declined to decide the issue on merits against which, the Revenue is
in appeal. Similar action was admittedly taken for 2001-02. 9 I.T.A. Nos.1545 & 1546/Mds/10
11. We have gone through the material on record as well as precedents
relied upon in the light of arguments of rival side and find that the Assessing
Officer in the original orders passed under 143(3) on 11.03.2003 and
19.03.2004 for the assessment years 2000-01 and 01-02 respectively has
neither discussed nor considered the point on the basis of which proceedings
under section 147 have been initiated. So far as earlier orders having been
passed under section 143(3), the Hon'ble Supreme Court vide order dated
29.07.2011, in the SLP to appeal (Civil) No.19085/2011 against the judgment
and order dated 14.02.2011 in WP No. 9036/2007 of the Hon'ble High Court of
Delhi in the case of Honda Siel Power Products Ltd. v. DCIT & Anr has passed
the following order:
"In our view, the reopening of assessment is fully justified on the facts and circumstances of the case. However, on the merits of the case, it would be open to the assessee to raise all contentions with regard to the amount of `.98.46 lakhs being offered for tax as well as it's contention on Section 14A of the Income Tax Act, 1961.
Subject to above, the special leave petition is dismissed."
12. Since in the above noted decision, reopening of the assessment has
been held to be fully justified on the facts and circumstances of the case so it
would be apt to extract and reproduce relevant portion on this issue from the
order of Hon'ble Delhi High Court, which considered the earlier decision of the
same High Court on this point in the case of Consolidated Photo and Finvest
Ltd. v. Asst. CIT (2006) 281 ITR 394, to elaborately interpret the relevant
wording about escapement as envisaged under section 147 from para 9 to 16,
which is reproduced as under:
10 I.T.A. Nos.1545 & 1546/Mds/10
9. Whether or not there was omission or failure on the part of the assessee to make full and true disclosure of material facts, the stand of the assessee-petitioner is illusionary and ambiguous. In the written submissions it is stated as under:-
"It is pertinent to point out that Section 14A was introduced in the Statute by the Finance Act, 2001 w.r.e.f. 1.4.1962. When the return of income was filed for the relevant assessment year, the provisions of section 14A were not on the Statute. There was
accordingly no obligation on the assessee to disclose any facts in respect of the said issue.
The Courts have in the following cases held that where a claim is rendered inadmissible on account of amendment of law introduced subsequently though with retrospective effect (covering the relevant year), it cannot be said that there was any failure on the part of the assessee to disclose fully and truly all material facts in respect thereof, to warrant exercise of jurisdiction under section 148 of the Act, beyond four years from the end of the relevant assessment year.
• CIT vs. SIL Investments Ltd.: ITA 700/2010 and 701/2010 (Del HC)
• Rallis India Limited vs. ACIT: 323 ITR 54 (Bom HC)
• Sadbhav Engineering Ltd. V DCIT: SCA No.
5847/2010 (Gujarat) HC (Copy enclosed and
marked as annexure A)"
10. Thus, the petitioner has accepted and admitted that he had not given details with regard to proportionate expenses relatable to tax free or exempt income, which were claimed as a deduction under the cumulative head "expenditure". It is pleaded and stated that the petitioner was not required to disclose the said fact as when they had filed the return, Section 14A was not in the statute book. Sequitor, there was no omission and failure on the part of the assessee-petitioner to make full and true disclosure. The term "failure" on the part of the assessee is not restricted only to the income-tax return and the columns of the income-tax return or the tax audit report. This is the first stage. The said expression "failure to fully and truly disclose material facts" also relate to the stage of 11 I.T.A. Nos.1545 & 1546/Mds/10
the assessment proceedings, the second stage. There can be omission and failure on the part of the assessee to disclose fully and truly material facts during the course of the assessment proceedings. This can happen when the assessee does not disclose or furnish to the Assessing Officer complete and correct information and details it is required and under an obligation to disclose. Burden is on the assessee to make full and true disclosure.
11. In the case of Consolidated Photo and Finvest Ltd. v. Asst. CIT, (2006) 281 ITR 394, the Delhi High Court has referred to several decisions of the Supreme Court and observed :-
"In Kantamani Venkata Narayana and Sons v. First Addl. ITO  63 ITR 638, the apex court held that in proceedings under article 226 of the Constitution of India challenging the jurisdiction of the Income-tax Officer to issue a notice for reopening the assessment, the High Court was only concerned with examining whether the conditions which invested the Income-tax Officer with the powers to reopen the assessment existed. It is not, observed the court, within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax. The court also held that from a mere production of the books of account, it could not be inferred that there had been full disclosure of the material facts necessary for the purposes of assessment. The terms of the Explanation, declared the court, were too plain to permit an argument that the duty of the assessee to disclose fully and truly all material facts would stand discharged when he
produces the books of account or evidence which has a material bearing on the assessment.
The court observed :
"It is the duty of the assessee to bring to the notice of the Incometax Officer particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth, the Income-tax Officer may not on that account be precluded from exercising the 12 I.T.A. Nos.1545 & 1546/Mds/10
power to assess income which had escaped assessment."
To the same effect is the decision of the Supreme Court in Malegaon Electricity Co. P. Ltd. v. CIT  78 ITR 466 where the court observed :
"It is true that if the Income-tax Officer had
made some investigation, particularly if he had looked into the previous assessment records, he would have been able to find out what the written down value of the assets sold was and consequently he would have been able to find out the price in excess of their written down value realised by the assessee. It can be said that the Income-tax Officer if he had been diligent could have got all the necessary information from his records. But that is not the same thing as saying that the assessee had placed before the Income-tax Officer truly and fully all material facts necessary for the purpose of
assessment. The law casts a duty on the assessee to „disclose fully and truly all material facts necessary for his assessment for that year‟."
12. The law postulates a duty on every assessee to disclose fully and truly all material facts for its assessment. The disclosure must be full and true. Material facts are those facts which if taken into accounts they would have an adverse affect on assessee by the higher assessment of income than the one actually made. They should be proximate and not have any remote bearing on the assessment. Omission to disclose may be deliberate or inadvertent. This is not relevant, provided there is omission or failure on the part of assessee. The latter confers jurisdiction to reopen assessment.
13. Whether or not there was a failure or omission to disclose fully and truly material facts, is essentially a question of fact. Section 14A was introduced with retrospective effect by Finance Act, 2001, which was tabled in the Parliament on 28th February, 2001 and was passed by the Parliament on 1st April, 2001. The petitioner is a multinational company and it is difficult to perceive and accept that their tax or the legal department was not aware and did not have knowledge about Section 14A of the Act. 13 I.T.A. Nos.1545 & 1546/Mds/10
14. In the objection dated 14th November, 2007 filed by the petitioner before the Assessing Officer on facts the petitioner had pleaded as under :
"In the case of the assessee the assessment was, completed under section 143(3) of the Act. Further, it would be evident from the reasons provided for
reopening the assessment that the reassessment has been initiated on appreciation of the papers/documents furnished alongwith the return of income. The notice under the section 148 of the Act initiating the
reassessment proceedings, therefore, could validly be issued till 31-03-2005 in terms of the proviso to section 147 of the Act. In the case of the assessee, none of the requirement of the proviso to section 147 of the Act apply in as much as there was no failure to file return of income nor is there any allegation as to failure to disclose fully and truly all material facts necessary for the assessment."
15. It is clear from the aforesaid paragraph the petitioner has accepted that "material particular" referred to in the first proviso not only refers to details in the Return but also explanations and details furnished during the course of assessment. The petitioner had not stated anything or given factual matrix to justify and state that the material facts had been fully and truly disclosed in the assessment proceedings and there was no omission or failure on the part of the petitioner. Explanation to section 147 stipulates that mere production of books of accounts or other evidence is not sufficient. (Refer paragraph 11 above wherein judgment in the Consolidated Photo and Finvest Ltd. (supra) has been quoted). Therefore merely because material lies imbedded in material or evidence, which the Assessing Officer could have uncovered but did not uncover is not a good ground to deny or strike down a notice for reassessment. Whether the Assessing Officer could have found the truth but he did not, does not preclude the Assessing Officer from exercising the power of re-assessment to bring to tax the escaped income.
16. There was an omission and failure on the part of the petitioner to point out the expenses incurred relatable to tax free/exempt income which prima facie have been claimed as a deduction in the income and expenditure account. There was, 14 I.T.A. Nos.1545 & 1546/Mds/10
therefore, omission and failure on the part of the petitioner to disclose fully and truly material facts."
13. Applying the ratio of the decisions as extracted and reproduced above,
we are of the considered opinion that in view of the facts and circumstances of
the case, impugned reopening of the assessments by the Assessing Officer for
both the years is justified and proper. So, the order of the ld. CIT(A) is set aside
for both the years in this regard and that of the Assessing Officer is restored.
Since the ld. CIT(A) has not considered the case on merits, therefore, the
matter on merits for both the years is restored back on his file to re-decide the
appeal on merits afresh for both the years after giving due opportunity to the
assessee as well as to the Assessing Officer.
14. In the result, appeals of Revenue are accepted/for statistical purposes.
Order pronounced on 09.09.2011.
Sd/- Sd/- (ABRAHAM P. GEORGE) (U.B.S. BEDI) ACCOUNTANT MEMBER JUDICIAL MEMBER
Chennai, Dated, the 09.09.2011