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Assessing Officer is bound to look at the Litigation History of the Assessee

In AVTEC Limited v. DCIT, the division of the Delhi High Court held that AO is bound to look at the litigation history of the assessee and cannot expect the assessee to inform him. 

In the instant case, the Petitioner, engaged in the business of manufacturing and selling of automobiles, power trains and power shift transmissions along with their components, approached the High Court challenging the re-assessment order passed against them. For the year 2006-07, the Petitioner entered into a Business Transfer Agreement with Hindustan Motors Ltd, as per which, the Petitioner took over the business from HML. 

While filing income tax return for the said year, the petitioner claimed the expenses incurred in respect of professional and legal charges for the purpose of taking over of the business from HML as capital expenses and claimed depreciation.

Though the above claim was denied by the AO, the ITAT allowed the claim on second appeal filed by the assessee. Though the department preferred an appeal before the High Court against the Tribunal order, it was dismissed on ground of monetory limit. Consequently, the claim of depreciation for the year 2006-07 became final. 

Subsequently, the IT Department initiated re-assessment proceedings against the assessee for the years 2008-09 to 2010-11 on ground that the petitioners claimed depreciation in respect of professional charges which is not allowable under section 43(1) of the Income Tax Act since as per the relevant BTA, Hindustan Motor Ltd. bore all the cost and expenses including professional fees. 

The AO, therefore, concluded that there is sufficient reason to believe that the assessee had escaped assessment ad failed to disclose all the material facts truly or fully. Before the High Court, the petitioner-assesse contended that there was no failure at all on the part of the Assesse to disclose fully and truly all material facts. 

According to them, from AY 2006-07 onwards, the Revenue was aware of the claim for depreciation made by allocating the aforementioned expenses to the block of assets and treating them as capital expenses and claiming depreciation thereon. Rebutting the arguments, the department submitted that the Petitioner may have disclosed the BTA and the fact of claiming depreciation by allocating the professional legal charges etc. as capital expenses to the block of assets for claiming depreciation thereon for AY 2006-07 and 2007-08. However, no such disclosure was made at the time of assessment for the AYs 2008-09, 2009-10 and 2010-11.

According to them, in none of the three AYs did the Petitioner mention in its return filed or during the assessment that this was a disputed claim and was disallowed by the AO for AYs 2006-07 and 2007-08. It was also submitted that the Petitioner had failed to mention in the „Schedule of Depreciation‟ that the costs/written down value of certain assets included such amounts which were not of capital nature or their admissibility was otherwise disputed. Allowing the petition, Justice S. Muralidhar, who penned the judgment, said that the mere fact that the incumbent AO dealing with the returns of the Assesse was different from the AO who dealt with there for the AYs 2006-07 and 2007-08 will not excuse the AO from examining the history of the case. 

The Court, rejected the argument of the department that each AY was different and, therefore, the AO was not obliged to look into the previous records. It said that “If the AO was seeking to invoke Section 148 of the Act for AYs 2008-09 to 2010-11 it was incumbent on him to ascertain the status of the identical claim in the earlier AYs. After all he was seeking to reopen an assessment only on the aspect of the claim of depreciation. 

On this very aspect the Revenue had for AY 2006-07 taken the matter up to the ITAT and the matter had been remanded to the AO. For AY 2007-08, the CIT (A)’s order allowing the claim had attained finality. These facts could not have escaped the attention of the AO. In any event, there was no fresh material that the AO came across to warrant reopening of the assessments for AYs 2008-09 and 2009-10. The plea that the AO inadvertently allowed the claim for depreciation for AYs 2008-09, 2009-10 and 2010-11 cannot in the circumstances be accepted.” 

Quashing the impugned orders, the bench held that the tangible material that the AO came across for the AYs in question is not sufficient to form ‘reasons to believe’ that the assessee had escaped assessment. “The reasons merely record the fact that HML had borne the costs and expenses including professional fee and, therefore, the capitalisation of those expenses to the various block of assets was not allowable under Section 43(1) of the Act. After recording the above statement, the AO adds: “I have reason to believe that due to failure on the part of the assesse to disclose all the material facts truly or fully, income of Rs.7,16,299 have escaped assessment.” This does not satisfy the requirement of law that the reasons to believe should, where the reopening is after the expiry of four years from the end of the FY, specifically state in what manner there was a failure by the Assessee to make a full and true disclosure of material facts. That, again, will have to be preceded by spelling out the tangible fresh material that led the AO to come to that conclusion. None of this is found in the reasons to believe recorded by the AO in the case on hand.”

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