The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) held that reassessment proceedings initiated beyond four years cannot be sustained in the absence of any failure by the assessee to disclose fully and truly all material facts. The Tribunal further held that once the very basis of reopening fails, the Assessing Officer cannot make additions on altogether different issues while framing a reassessment under Section 147 of the Income Tax Act, 1961.

A Bench comprising Accountant Member Annapurna Gupta and Judicial Member Siddhartha Nautiyal dismissed the Revenue’s appeal in the case of Electrotherm (India) Limited for AY 2013-14.

The assessee had originally filed its return declaring a loss of Rs 230.76 crore, and assessment under Section 143(3) was completed in March 2016. Subsequently, the Assessing Officer reopened the assessment on the ground that the assessee had received a government subsidy of Rs 5.24 crore, which, according to the department, partly related to revenue expenditure and ought not to have been entirely credited to capital reserve.

During reassessment proceedings, the assessee explained that the subsidy was sanctioned for capital projects relating to contifur technology and pellet plant projects, and all expenditure relating to such projects had already been capitalised. It was further submitted that the revenue expenditure claimed under research and development mainly pertained to employee salary expenses and was unrelated to the subsidised project. However, the Assessing Officer disallowed the R&D expenditure of Rs.3.74 crore, alleging that the assessee had claimed a double benefit by capitalising project expenditure while simultaneously claiming a revenue deduction.

The CIT(A) quashed the reopening, holding that reassessment had been initiated after the expiry of four years without any failure on the part of the assessee to disclose material facts. The CIT(A) observed that all details relating to subsidy and accounting treatment were already available in the audited financial statements examined during the original scrutiny assessment.

“Section 147 does not allow the re-assessment of an income merely because of the fact that the Assessing Officer has a change of opinion.” The CIT(A) also held that the reassessment itself was invalid since the addition ultimately made by the Assessing Officer related to R&D expenditure, whereas reopening was initiated on the issue of subsidy allegedly treated as capital receipt.

Before the Tribunal, the Revenue could not controvert the factual findings recorded by the CIT(A) that the reopening was based only on material already available in the audit report and financial statements. The Tribunal noted that no fresh tangible material had been brought on record by the Assessing Officer for reopening the completed assessment beyond four years.

The Tribunal further observed that while reopening was initiated on the allegation that subsidy should have been treated partly as revenue receipt, the reassessment order ultimately made a disallowance on an entirely different issue concerning R&D expenditure and alleged double deduction. “The reassessment framed was invalid and without jurisdiction.”

Relying on the decisions of the Supreme Court in ITO vs Techspan India Pvt. Ltd and the Bombay High Court in CIT vs. Jet Airways, the Tribunal upheld the order of the CIT(A) and dismissed the Revenue’s appeal. Thus, the reassessment proceedings under Section 147, as well as the disallowance of Rs 3.74 crore towards R&D expenditure, were quashed.

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