Facts of the Case

The petitioner company, engaged in the business of maintenance and management of properties, filed its return declaring a loss for the Assessment Year 2002-03. During the original assessment proceedings, the Assessing Officer issued detailed questionnaires under Section 143(2) seeking clarification regarding depreciation claimed on fixed assets amounting to Rs. 74,85,196/-.

The petitioner furnished complete details relating to acquisition of plant and machinery, bills, invoices, business arrangements, and explanation regarding the allowability of depreciation. It was specifically disclosed that the company had acquired machinery and entered into agreements for maintenance and management services in connection with commercial complexes at Gurgaon.

After considering the documents and replies furnished by the petitioner, the assessment was completed under Section 143(3) on 24.02.2005.

Subsequently, after expiry of four years, the Assessing Officer issued notice under Section 148 alleging that depreciation had been wrongly allowed because business activities had not commenced during the relevant assessment year and therefore income chargeable to tax had escaped assessment. 

Issues Involved

  1. Whether reassessment proceedings under Sections 147 and 148 can be initiated after expiry of four years from the end of the relevant assessment year when the assessee had fully and truly disclosed all material facts.
  2. Whether reopening of assessment on the same material already examined during original assessment amounts to mere change of opinion.
  3. Whether depreciation on plant and machinery was allowable when the business was set up though actual income had not yet commenced. 

Petitioner’s Arguments

  • The petitioner argued that all primary and material facts relating to depreciation claim had been fully disclosed during the original scrutiny assessment proceedings.
  • Detailed replies, agreements, invoices, and explanations regarding use of plant and machinery were submitted before the Assessing Officer during assessment under Section 143(3).
  • The reassessment notice issued beyond four years was without jurisdiction because there was no failure to disclose material facts.
  • The petitioner relied upon the judgment in GKN Driveshafts (India) Ltd. vs Income Tax Officer & Ors. asserting that reassessment proceedings cannot be sustained merely on change of opinion.
  • It was further contended that once the business had been set up and machinery was ready for use, depreciation claim was legally permissible even if substantial income generation had not commenced. 

Respondent’s Arguments

  • The Revenue contended that depreciation had been wrongly allowed because no business activity was carried out during the relevant assessment year.
  • According to the Assessing Officer, the assets acquired by the assessee were not put to use and therefore depreciation was inadmissible.
  • The respondent asserted that income chargeable to tax had escaped assessment due to excessive depreciation allowance and therefore reassessment proceedings under Sections 147 and 148 were validly initiated.
  • It was further argued that the Assessing Officer had reason to believe that reassessment was necessary to protect the interest of revenue. 

Court Findings / Order

The Delhi High Court allowed the writ petition and quashed the reassessment notice issued under Section 148 along with all consequential proceedings.

The Court held that:

  • The petitioner had fully and truly disclosed all material facts relating to the depreciation claim during the original assessment proceedings.
  • The Assessing Officer had specifically examined the issue of depreciation while completing assessment under Section 143(3).
  • Reopening of assessment was based merely on a different inference drawn from the same material already available on record, which amounted to impermissible change of opinion.
  • In absence of any failure by the assessee to disclose material facts, the jurisdictional requirement for reopening beyond four years under Section 147 was not satisfied.
  • The reassessment proceedings were therefore without jurisdiction and liable to be quashed. 

Important Clarification by the Court

The Court clarified that:

  • It is not the duty of the assessee to advise the Assessing Officer regarding what inference should be drawn from disclosed facts.
  • Once all primary facts are disclosed, reassessment cannot be initiated merely because the Assessing Officer subsequently forms a different opinion.
  • Reassessment provisions cannot be used as a mechanism for review of completed scrutiny assessments.
  • Mere change of opinion does not constitute “reason to believe” under Section 147 of the Income Tax Act. 

Sections Involved

  • Section 143(2) – Scrutiny Assessment
  • Section 143(3) – Regular Assessment
  • Section 147 – Income Escaping Assessment
  • Section 148 – Issue of Notice for Reassessment 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:9147/RVE13022012CW138782009_122853.pdf

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