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2015 (4) TMI 942 - KARNATAKA HIGH COURT

2015 (4) TMI 942 - KARNATAKA HIGH COURT - TMI - Reopening of assessment - deferred revenue concealed - notice issued under section 148 challenged on the ground of jurisdictional error - Held that:- In the instant case, the deferred revenue for the assessment year 2009-10 according to the Assessing Officer ought to have been admitted or included by the assessee in the assessment year 2010-11 and on account of same having not been offered, has given rise for reopening of the assessment. Nothing pr .....

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2009-10 suffers from any jurisdictional error.

It has also been specifically made clear thereunder by 1st respondent that deferment of revenue has not been accepted even by the DRP and what has been stated in the said communication is that reply submitted by petitioner does not demonstrate or establish that total amount of ₹ 216,89,00,773/- had been offered to tax in the assessment year 2010-11. The issue involved is the escapement of income to tax for the assessment year 2009 .....

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R> As decided in WHIRLPOOL CORPORATION VS. REGISTRAR TRADE MARKS, MUMBAI AND OTHERS [1998 (10) TMI 510 - SUPREME COURT] & T.T. PVT. LTD. Vs. INCOME TAX OFFICER, COMPANY CIRCLE-III, BANGALORE reported in (1978 (9) TMI 23 - KARNATAKA High Court) has held that availability of alternate remedy under the Act would not be a bar for this Court to examine the notice issued under section 148 of the Income Tax Act, 1961, if it is challenged on the ground of jurisdictional error. - Decided against assesse .....

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the Act. Petitioner has challenged the notice issued for reassessment and order passed by first respondent holding that there is no error of jurisdiction. In order to examine the issue involved in this present petition facts relevant for the said purpose requires to be noticed which are as under. 2. Petitioner is engaged in the manufacture and sale of computer hardware and related products. For the assessment year 2009-10 which relates to Financial year 2008-09 return of income came to be filed .....

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the basis of which order under section 143(3) read with Section 144C of the Act came to be passed on 31.01.2014, Annexure-H. Being aggrieved by the same petitioner is said to have filed an appeal and same is filed before first appellate authority and same is pending. 3. First respondent has issued a notice under section 148 of the Income Tax Act to the petitioner-assessee on 27.03.2014 Annexure-K indicating thereunder that he has reason to believe that income in respect of which petitioner-asses .....

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in response to notice issued under section 148 of the Act. At the same time petitioner also called upon the first respondent to furnish reasons for initiating reassessment proceedings. Pursuant to the same, Assessing officer namely first respondent intimated the petitioner by communication dated 25.04.2014 Annexure- M, reasons for reopening indicating thereunder that deferred revenue totaling ₹ 216,89,00,773/- which was deferred in the assessment year 2009-10 was not added while computing .....

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sment year 2009-10 was not admitted for sales in the assessment year 2010-11. On this ground also Assessing officer had opined that he had reason to believe that income of ₹ 216,89,00,773/- assessable to tax has escaped the assessment for the year 2009-10 and as such he proposed to reassess the income of petitioner under section 147 of the Act. Said reason assigned by the Assessing officer on being furnished came to be replied by petitioner assessee by challenging the same on the grounds i .....

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AY 2010-11. The table in the submission does not show it. 2. Re-opening u/s 148 in your case for the AY 2009-10 is not based on a mere change of opinion but is based on the fact an amount of ₹ 216,89,00,773/- which was deferred in AY 2009-10 has not been offered in the subsequent assessment year. 3. Regarding deferment of revenue, the DRP in its order for AY 2010-11 has upheld the stand taken by the Assessing Officer that such deferral may work against revenue not just because it is not pe .....

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ths Perly Pardiwalla, Learned Senior Counsel appearing on behalf T. Suryanarayana, for petitioner and K.V.Aravind, learned panel counsel appearing for respondents. 6. It is the contention of Sri. Perly Pardiwala, learned senior counsel appearing for petitioner that Rs. mere change of opinion' would not be a ground for reopening assessment order and particularly when no new material is detected, so as to arrive at a conclusion that there is escaping of declaration by the assessee at the time .....

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uld also contend that there should be rational nexus between the reasons and the belief that income has escaped from assessment and there should be existence of reasons on which a belief can be entertained by Assessing officer that income has escaped assessment and mere belief being in existence without backed by reasons would not be sufficient to reopen the assessment. He would also contend that reasoning provided by first respondent for reopening the assessment for the year 2009-10 is that pet .....

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fered to its customers installation and warranty service which does not necessarily come to end in the year of sale but may be spread over a period of two or more accounting years and as such petitioner recognizes the said revenue proportionately over the period of service contract and offers to tax in the subsequent assessment years when the obligation to render services arises. He would also elaborate his submission by contending that entire sale price for sale of products together with warran .....

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d Rs. other liabilities' in the balance sheet of the petitioner company and this policy is consistently being followed by the petitioner which is in para materia with the accounting pattern and system formulated by Institution of Chartered Accountant of India. He would draw the attention of the court to assessment order for the assessment year 2009-10 where under the Assessing officer had an occasion to particularly examine the accounting policy adopted by petitioner and after noticing the e .....

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eld that there was no concept of deferred revenue under the Act. By virtue of such change of view the assessment order for the assessment year 2009-10 is sought to be reopened by invoking section 147 and issuing notice under section 148 of the Act which is based purely on the changed opinion and change of opinion would not be a ground for re-opening of the assessment. He would draw the attention of court to section 147 which has undergone change by Direct Tax Laws Amendment (1989) with effect fr .....

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s Assistant Commissioner of Income Tax and others 3. (1997) 95 Taxman 579 (P & H) - Commissioner of Income tax Vs Punjab Tractors Co-op.Multipurpose Society Ltd. 4. Unreported Judgment of High Court of Judicature, Bombay rendered in W.P.1327/2013 on 16.07.2014 - Aroni Commercials Ltd., Vs The Assistant Commissioner of Income Tax 2(1) Mumbai and anr 5. (1980) 121 ITR 551 - T.T. Pvt. Ltd., Vs Income Tax Officer, Company Circle-III, Bangalore. 7. He would also contend that in anticipation of th .....

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and for this proposition he has relied upon the Judgment of Division Bench of this court in the case of T.T. Pvt. Ltd., Vs Income Tax Officer, Company Circle-III, Bangalore reported in (1980) 121 ITR 551 and contends that writ petition is maintainable and same cannot be dismissed on the ground of alternate remedy. Hence, he prays for allowing the writ petition and seeks for quashing of the impugned notice and prays for setting aside the reasons assigned by the respondent for sustaining the notic .....

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aving received the amounts by way of warranty from its customers and having not established as to when the said amounts received had been offered to tax, Assessing officer had reason to believe that it has escaped assessment and as such Assessing Officer had called upon the petitioner to prove that such income in respect of which petitioner has declared in the return of income as deferred revenue having suffered tax with details thereof and contends that inspite of several particulars being give .....

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be done and in the event of petitioner is able to establish, petitioner would be entitled for such allowances as is permissible under the Act. He would draw the attention of the court to 2nd proviso of section 147(1) of the Act to contend that it is incumbent upon the assessee to disclose fully and truly all material facts and during the assessment proceedings and despite calling upon petitioner by issuance of notice to furnish details of smart debits deferred revenue and same having not been fu .....

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ments: 1. (2007) 291 ITR 500 (SC) - Assistant Commissioner of Income Tax Vs Rajesh Jhaveri Stock Brokers (P) Ltd. 2. Unreported Judgment in the case of Jeans Knit Private Limited Vs The Deputy Commissioner of Income Tax, Circle 11(5) and others in W.A.5789/2013 dated 29.04.2014. 3. Judgment of Division Bench of High Court of Judicature at Madras in W.A.347-349/2014 and connected matters disposed of on 04.07.2014 - The Joint Commissioner of Income Tax and others Vs Kalanithi Maran, Kavery Kalanit .....

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easons assigned by the 1st respondent vide communication dated 25.04.2014 Annexure-M rejecting the objections raised by petitioner for reopening the assessment for the year 2009-10 can be held to satisfy the criteria prescribed under Section 147 of the Act?" 11. In order to delve upon the points formulated herein above it would be necessary to extract the relevant provisions which has bearing on the issue namely Section 147 and same is extracted herein below: "147. If the Assessing Off .....

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reafter in this section and in sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a .....

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ssessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment". 12. Perusal of above provision would indicate that prior to amendment Section 147 of the Act enabled the Assessing officer to re-open the assessment if he had formed an opinion about any income chargeable to tax had escaped assessment and reasons for such re-opening was require .....

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is for reopening of such concluded assessment under section 148 of the Act. A notice is required to be issued by the Assessing officer to reopen the assessment, if has reason to believe that any income chargeable to tax had escaped assessment at the time of passing the assessment order. In other words there should be relevant material available before the Assessing officer upon which he reasonably or rationally can form belief that any income chargeable to tax has escaped assessment. The formati .....

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reasonable belief' entertained by the Assessing officer prior to issue of such notice or it is only because of change of opinion. Sufficiency of such material cannot be a ground which can be examined by the court while examining a plea, attacking such notice issued under section 148 read with section 147. For this proposition judgment of Hon'ble Apex Court in the case of Raymond Woollen Mills Ltd., Vs ITO reported in (1999) 236 ITR 34 (SC) can be looked up. 13. The Assessing officer at t .....

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the assessment. Hon'ble Apex Court in the case of Commissioner of Income Tax Vs Kelvinator of India Ltd., reported in (2010) 320 ITR 561 (SC) which has been very heavily relied upon by Learned Senior Counsel appearing for petitioner has held that power to reopen or reassess post 01.04.1989 is much wider than the pre 1989 amendment. It has been held that assessing officer has power to reopen the concluded assessment provided there is Rs. tangible material' before him to come to a conclus .....

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ssing Officer to make a back assessment, but in section 147 of the Act (with effect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post -1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afrai .....

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reated as an order passed under section 143(3) has held in the negative and in this process, scope and effect of sections 147 and 148 also came to be examined. While so examining it has been held by the Apex Court that expression Rs. reason to believe' cannot be read to mean that Assessing officer should have ascertained the fact by legal evidence or conclusion. It has been held by Apex Court as under: "16. Section 147 authorises and permits the Assessing Officer to assess or reassess i .....

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ed the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court in Central Provinces Manganese Ore Co. Ltd. v. ITO (1991) 98 CTR (SC)161:(1991) 191 ITR 662 (SC), for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. A .....

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f belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. (1996) 132 CTR (SC) 162: (1996) 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO (1999) 152 CTR (SC) 418: (1999) 236 ITR 34 (SC). 17. The scope and effect of section 147 as substituted with effect from 1st April, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of s .....

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(i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a) But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has .....

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s to initiate reassessment proceedings even when intimation under section 143(1) had been issued". 15. Keeping these principles in mind when the facts on hand are examined it would indicate that during the course of assessment proceedings for the assessment year 2009-10 assessee had requested the Assessing officer to reconcile the sales as per sales tax return and sales declared in the return of income. Said returns on comparison was found by Assessing officer that sales as per sales regist .....

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ning the assessment vide reply dated 25.04.2014 Annexure-M it has been noticed by the Assessing officer that deferred revenue in the reconciliation statement and the deferred revenue in the balance sheet -other liabilities were more or less same. It was noticed by Assessing officer that petitioner-assessee in the schedule of other liabilities, had indicated further break-up of smart debits deferred revenue account was as under: Deferred revenue account - Short term deferred revenue warranty - &# .....

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id not add such deferred revenue while computing the total income for the relevant assessment year as indicated in the assessment order for the reasons now assigned for re-opening the assessment vide Annexure-M namely that petitioner company may have admitted the sales in the subsequent assessment year. As noticed earlier petitioner-company is engaged in the sales of computer hardware and related products by offering to its customers warranty services for different period the details of which is .....

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the Assessing officer at the stage of considering reply submitted by the assessee to the reopening notice for reasons more than one. Firstly details of such break up are not forthcoming. There might be situations where warranty expiring after one year, or even two years or three years which might have been offered by petitioner-assessee to its customers. Thus, it depends on factual aspects. It is because of this precise reason Assessing officer has called upon the assessee to furnish details the .....

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lways open to the assessee to place all such material in support of its contention before the Assessing officer to establish as to when and how and in what mode such warranty which is claimed by it as deferred revenue would accrue as its income which has been treated as deferred revenue and same having been offered to tax in the subsequent year/s. 18. As already noticed hereinabove, the words used in Section 147 of the Income Tax Act, 1961 empowers the Assessing Officer to issue notice for reope .....

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ee. As such, if Assessing Officer has reason to believe income having escaped to tax it would give him the power to reopen the assessment and change of opinion would not. 19. In the instant case, the deferred revenue for the assessment year 2009-10 according to the Assessing Officer ought to have been admitted or included by the assessee in the assessment year 2010-11 and on account of same having not been offered, has given rise for reopening of the assessment. Nothing prevented the petitioner .....

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ny jurisdictional error. Reply to notice issued under Section 148 of the Act which has been furnished by the petitioner-assessee to 1st respondent on 09.05.2014 vide Annexure-N has been examined by the Assessing Officer to reject the said contention for the reasons indicated in the communication dated 24.02.2015 Annexure-P. It has also been specifically made clear thereunder by 1st respondent that deferment of revenue has not been accepted even by the DRP and what has been stated in the said com .....

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, I do not find any jurisdictional error having been committed by the Assessing Officer to reopen the assessment for the assessment year 2009-10 by issue of impugned notice and also over-ruling of objections raised by the petitioner assessee to such notice. For these myriad reasons, it has to be held that impugned notice dated 27.03.2014 (Annexure-K) and reasons assigned in the endorsement issued by 1st respondent to reopen the assessment for the assessment year 2009-10 dated 24.02.2015 (Annexur .....

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