2019 (1) TMI 1537 - HC - Income Tax

Invalidity of Reopening Notice for Private Limited Company Due to Time Limit and Lack of Grounds

The High Court held that the notice of reopening of assessment issued to a private limited company was invalid as it was beyond the prescribed period and ... Reopening of assessment - assessment done beyond the period of 4 years from the end of relevant assessment year - disallowance of write off entire expenditure as project was abandoned - Held that:- Reasons recorded by the AO for issuing the impugned notice neither record nor point out that there was any failure on part of the assessee to disclose truly and fully all material facts necessary for assessment. Infact, the reasons proceed on the perusal of the case recorded by the Assessing Officer. Thus, clearly the mandatory requirement for reopening of assessment beyond 4 years flowing from the first proviso to Section 147 of the Act in the present case is not satisfied. During the year under consideration, as per assessee's submission, project was abandoned and no income on this account has been generated, despite the fact that construction of such assets was carried out by the assessee. It cannot be accepted that no income even on account of scrap sale or debris has been generated. Once the construction work was started, then it must have been sold to other persons. It is a fact that entire expenditure was incurred on capital account. Now assessee's claim as revenue expenditure treating it as a write off when entire expenditure were in the nature of capital, cannot be accepted and treated as revenue expenditure. Further, genuineness of the expenses is also not proved because assessee has paid huge amount on account of rent, which is almost 50% of the total expenses. The genuineness was not brought into question in earlier years as the assessee was capitalizing all project expenses. Now the assessee is claiming to write off entire expenditure. The assessee failed to justify rent payment which was paid arbitrarily without any comparative rate with market. A vacant piece of land cannot be charged so much high rent. Assessee's claim that project was abandoned due to recession is also contrary to the facts because when assessee has started the project, condition of air catering market were more or less same from start to end of the assessee's project. This fact can be verified from the receipt of the assessee because revenue receipt is almost remains the same between F.Y. 2008-09 to 2010-11. As against this order of assessment, the petitioner filed appeal. It can thus be seen that the Assessing Officer had occasion to examine the claim and infact in the order of assessment, he had disallowed the same. In the context of such sum, therefore, it cannot be stated the income chargeable to tax has escaped assessment. - Decided in favour of assessee. Issues:- Challenge to notice of reopening of assessment beyond the prescribed period.- Failure to disclose material facts for assessment.- Validity of reasons for reopening assessment.- Disallowance of claimed expenses during original assessment.Challenge to notice of reopening of assessment beyond the prescribed period:The petitioner, a private limited company, challenged a notice of reopening of assessment issued by the Assessing Officer beyond the period of four years from the end of the relevant assessment year. The Assessing Officer had issued the notice based on reasons recorded, alleging that the petitioner failed to disclose fully and truly all material facts necessary for assessment. The petitioner objected to the notice, which was rejected, leading to the petition.Failure to disclose material facts for assessment:The Assessing Officer's reasons for reopening the assessment highlighted the failure of the petitioner to disclose material facts, specifically related to an amount debited to the profit and loss account without evidence regarding its allowability as an expense. The reasons suggested that the petitioner consciously evaded paying taxes on this undisclosed income, leading to the belief that income had escaped assessment due to the petitioner's failure to make full and true disclosure.Validity of reasons for reopening assessment:The High Court found that the impugned notice could not be sustained as it was issued beyond the prescribed period of four years and did not satisfy the mandatory requirement for reopening assessments. The reasons recorded by the Assessing Officer did not establish any failure on the part of the petitioner to disclose all material facts necessary for assessment, as they were based on erroneous grounds. The court noted that the Assessing Officer had already examined and disallowed the claimed expenses during the original assessment, indicating that there was no escapement of income chargeable to tax.Disallowance of claimed expenses during original assessment:During the original assessment proceedings, the Assessing Officer had disallowed the entire claim of expenses made by the petitioner, including the specific amount in question. The petitioner had provided detailed representations justifying the claimed expenses, but the Assessing Officer did not accept them. The court observed that since the claimed expenses were already examined and disallowed during the original assessment, there was no basis for reopening the assessment based on the same grounds. Consequently, the court set aside the impugned notice, allowing the petition and disposing of the matter.