TMI Blog2013 (5) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment, gave reasons for disallowing expenditure relateable to such advance income. He concluded that the assessee in the books recognizes this expenditure as current liabilities but the corresponding services are to be offered in the next financial year. He therefore held that, "the expenditure not relateable to the earning of income naturally has to be allowed in the year in which the corresponding income is offered to tax". He thus proceeded on the basis that the income in question would be taxed in the future years and that therefore, expenditure relateable to such income cannot be a valid deduction in the current year. Thus AO having examined the nature of receipts and the corresponding expenditure in the original assessment, now cannot be permitted to change his view with respect to the nature of treatment such receipts must receive. AO made no additions on the count that the payments towards re-charges were not advance but accrued income and made disallowances of the expenditure pro-rata relatable to such income deferred by the assessee to be accounted for in the future years. Thus, impugned notice is quashed. - SPECIAL CIVIL APPLICATION NO. 16456 of 2012 - - - Dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee as soon as the "Recharges" are purchased by customers. The Hon'ble S.C. In the case of CIT v. Ashokbhai Chimanbhai (56 ITR 42) held that the income accrues when assessee acquire right to receive it Since followed mercantile system of accounting, income accrues with receipt as the same is not refundable and it cannot be considered as advance income. It was further noticed that from the Para 5 of the assessment order that the assessing officer has disallowed corresponding expenses incurred for earning the advance income. The disallowance of expenditure worked out to Rs. 1,08,00,000/- on proportionate basis (cost of goods + marketing, sales and distribution expenses Advance income, Total Sales) Since the assessee received money in advance income towards prepaid charges which is not refundable, such receipts are required to be treated as income and not advance income. This has resulted in under assessment of income to the extent of Rs.122,88,00,000/-(123.96 crores less Rs. 1.08 crores) on which short levy of tax worked to Rs.55,54,99,929/- (Tax Rs. 41,76,69,120/- + interest of Rs. 13,78,30,809/-) u/s 234 B of IT Act. In view of the above I have reasons to believe that income c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ped assessment. 6. During the assessment, the Assessing Officer raised certain queries to the assessee on 15th December 2010. He, on the office-note, recorded as under :- "Shri Diren Shah, AR of the assessee from S.R Batliboi Company appeared. He is asked to furnish the details of advance income [as shown in the balance sheet] and the corresponding expenditure incurred upon it. Case discussed." 7. In response to such a query, the petitioner supplied a detailed explanation under communication dated 24th October 2010, relevant portion of which reads as under :- "We refer to the ongoing scrutiny assessment proceedings for the subject assessment year and our time to time discussions in this regard. During the course of assessment proceedings your goodself required us to show cause why expenses incurred in relation tot he advance income should not be disallowed while finalizing the assessment proceedings. In connection with above, on behalf of and under the instructions of our above named client, we wish to submit as under :- 1. The assessee is engaged in the business of providing cellular telecommunication services in the state of Gujarat. In accordance with mercantile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed any expenditure towards advance income and hence no adjustment is required to be made while finalizing the assessment proceedings for the year under consideration." 8. The Assessing Officer passed his order of assessment on 30th December 2010. It is a detailed order discussing various issues arising out of the return filed by the petitioner. With respect to the expenditure relating to advance income, the Assessing Officer opined as under :- "5.4 Disallowance of Expenditure with respect to Advance Income : 5.5 Upon going through the details furnished by the assessee it was noticed that an amount of Rs. 123.96 Crores was shown as Advance income that had been shown as a current liability. The consumers buy the recharge coupons in the month of March of the year. It happens, and it usually does, that the entire amount of recharge coupon is not utilized during the month. The amount not utilized during the month is therefore carried over to the succeeding months. The assessee in its books recognizes these as current liabilities, as the corresponding services are to be offered in the next F.Y. These question that now arises for determination is whether the corresponding expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is offered to tax in the next years. Similarly if the revenue is recognized in the current year, the corresponding expenditure only, and not some other expenditure, has to be claimed. Reliance in this regard can be placed upon the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102 wherein the Hon'ble High Court has explained the concept in the following words : "Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following the mercantile system of accounting. This matching concept is very relevant to compute taxable income." 5.8 The allocation in the absence of any specific details furnished by the assessee would have to be done upon a proportionate basis, i.e. the amount of advance income shown as a percentage of the income from operations. The working of the proportionate disallowance is worked out as under. Cost of Goods Sold (In crores) 6.69* (123.96/1875.99) = 44 crores Marketing, Sales and Distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reasons to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from the companies against omission of the words "reasons to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer." 10. The question, under which circumstances, the Assessing Officer can be stated to have formed a opinion in the original assessment came up for consideration before the Division Bench in case of Gujarat Power Corpn. Ltd. v. Asstt. CIT [2013] 350 ITR 266. Various issues were examined. Whatever is relevant for our purpose is that revenue had contended that if in the original assessment proceedings, the Assessing Officer raised certain queries, thereafter if he did not to make any disallowances or additions on such issue without assigning any reason in the assessment order, the Assessing Officer cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons for several claims so made and accepted by him, it would even otherwise cast an unreasonable expectation which within the short frame of time available under law would be too much to expect him to carry. Irrespective of this, in a given case, if the Assessing Officer on his own for reasons best known to him, chooses not to assign reasons for not rejecting the claim of an assessee after thorough scrutiny, it can hardly be stated by the revenue that the Assessing Officer cannot be seen to have formed any opinion on such a claim. Such a contention, in our opinion, would be devoid of merits. If a claim made by the assessee in the return is not rejected, it stands allowed. If such a claim is scrutinized by the Assessing Officer during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position. It may be a non-reasoned order but not of acceptance of a claim without formation of opinion. Any other view would give arbitrary powers to the Assessing Officer. 43. We are, therefore, of the opinion that in a situation where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. To hold that the Assessing Officer must be deemed to have accepted what he has plainly overlooked or ignored in the assessment order would be to stretch the interpretation of section 147 to a point where the provisions would cease to have meaning and content. Such an exercise of excision by judicial interpretation is impermissible. When an assessment is sought to be reopened within a period of four years of the end of the relevant assessment year, the test to be applied is whether there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. Something which is tangible need not be something which is new. An Assessing Officer who has plainly ignored relevant material in arriving at a n assessment act contrary to law. It there is an escapement of income in consequence, the jurisdictional requirement of section 147 would be fulfilled on the formation of a reason to believe that income has escaped assessment. The reopening of the assessment within a period of four years is in these circumstances within jurisdiction." 13. Bearing in mind above principles, we may examine the facts more closely. In the original ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis that the income in question would be taxed in the future years and that therefore, expenditure relateable to such income cannot be a valid deduction in the current year. 14. It was precisely in this background that for the reasons recorded, the Assessing Officer after disclosing his prima facie belief that the payments towards recharges would not be an advance but an accrued income, proceeded to state that in the assessment order corresponding expenditure was disallowed which came to Rs. 1.08 Crores on proportionate basis. He further stated that, "... Since the assessee received money in advance income towards prepaid charges which is not refundable, such receipts are required to be treated as income and not advance income. This has resulted in under assessment of income to the extent of Rs. 122,88,00,000/= [123.95 crores less Rs. 1.08 Crores] on which short levy of tax worked to Rs. 55,54,99,929/= [Tax Rs. 41,76,69,120/= + interest of Rs. 13,78,30,809/= under Section 234 B of I.T Act]." 15. To our mind, the Assessing Officer having examined the nature of receipts and the corresponding expenditure in the original assessment, now cannot be permitted to change his view with r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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