Facts of the Case

The assessee, Rajkamal Agro Industries, filed its return of income for Assessment Year 2015-16. The original assessment was completed under Section 143(3). Subsequently, the Assessing Officer reopened the assessment under Section 147 on two grounds: first, that the assessee had allegedly claimed excess depreciation by not reducing capital subsidy from the cost of machinery, and second, that the assessee had undervalued its closing stock of hulled sesame seeds by claiming excessive shortage during the manufacturing process.

Based on audit objections, the Assessing Officer applied a formula to compute the value of closing stock at ₹1,19,39,599 as against ₹89,08,009 shown in the books, and completed reassessment making an addition of ₹30,31,590 on account of alleged undervaluation of closing stock. The Commissioner of Income Tax (Appeals), NFAC upheld the reopening and the addition. Aggrieved, the assessee preferred an appeal before the Tribunal.

Issues Involved

Whether reopening under Section 147 was valid when the reasons recorded were solely based on audit objections without independent application of mind by the Assessing Officer, whether reassessment could be initiated on issues already examined during original assessment without any new tangible material, and whether the addition for alleged undervaluation of closing stock could be sustained.

Petitioner’s Arguments

The assessee contended that reopening was invalid as it was initiated purely on audit objections. It was submitted that no capital subsidy was received during the relevant assessment year and that the subsidy received in earlier years had already been reduced from the cost of assets. Even the audit objection on depreciation was marked as “objection not accepted” by the Assessing Officer.

With respect to undervaluation of closing stock, it was argued that the audit party had exceeded its jurisdiction by applying its own formula to re-work stock valuation, and that the Assessing Officer merely reproduced the audit objection verbatim without examining the assessment records or forming an independent belief of escapement of income.

Respondent’s Arguments

The Revenue fairly conceded that no addition was ultimately made on the issue of excess depreciation and that the capital subsidy was not received in the year under consideration. On the issue of closing stock, the Revenue relied on the findings of the lower authorities.

Court Order / Findings

The ITAT Ahmedabad observed that reopening on the issue of depreciation was clearly invalid as the Assessing Officer himself had not accepted the audit objection and no addition was made on that issue even in reassessment proceedings.

Regarding the alleged undervaluation of closing stock, the Tribunal held that the audit party had merely re-appreciated existing records and applied its own formula to compute stock valuation. The Tribunal observed that there was no new tangible material coming to the knowledge of the Assessing Officer to justify formation of belief of escapement of income. Reopening was thus based on borrowed satisfaction and re-appraisal of the same material already on record, which is impermissible in law.

Accordingly, the Tribunal held that the reopening of assessment under Section 147 was bad in law and quashed the reassessment proceedings in entirety.

Important Clarification

The Tribunal clarified that reassessment cannot be initiated merely on the basis of audit objections or change of opinion. Independent application of mind by the Assessing Officer and existence of new tangible material are mandatory pre-conditions for valid reopening under Section 147.

Final Outcome

The appeal filed by the assessee was allowed. The reopening under Section 147 was quashed, and the consequent reassessment order, including the addition of ₹30,31,590 for alleged undervaluation of closing stock, was set aside in full.

 Link to download order https://www.mytaxexpert.co.in/uploads/1769062057_RAJKAMALAGROINDUSTRIESDEESAVS.ITOWARD1PALANPURPALANPUR.pdf

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