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2016 (4) TMI 167 - DELHI HIGH COURT

2016 (4) TMI 167 - DELHI HIGH COURT - [2016] 383 ITR 361 - Reopening of assessment - Held that:- Apart from the mistake made in the audit report by mentioning the system of accounting of the Assessee as ‘mixed’ and the letter issued by the Assessee himself, no other ‘tangible material’ was cited to justify the reopening of assessment for AY 2006-07 and 2007-08, the two years for which the reopening was beyond the period of four years. The reasons provided were the same reasons supplied for the r .....

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ently been following the mercantile system of accounting not only for AYs in question but for the earlier and later AYs as well.

Since the action of the Revenue was based on a factually erroneous premise, the Court is of the view that the reopening of the assessments for the said AYs is not sustainable in law. Decided in favour of assessee - W.P.(C) 924/2014 & CM 1873/2014 (for stay), W.P.(C) 1045/2014 & CM 2151/2014 (for stay), W.P.(C) 3077/2015 & CM 5498/2015 (for stay), W.P.(C) 307 .....

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ect to all just exceptions. 2. The applications are disposed of. W.P.(C) No. 924/2014 & CM No. 1873/2014 (for stay) W.P.(C) No. 1045/2014 & CM No. 2151/2014 (for stay) W.P.(C) No. 3077/2015 & CM No. 5498/2015 (for stay) W.P.(C) No. 3078/2015 & CM No. 5500/2015 (for stay) 3. These four writ petitions by Dr. Ajit Gupta, a medical practitioner who is an Assessee, challenge the notices issued to the Assessee by the Deputy Commissioner of Income Tax ( DCIT ), Circle 37(1), New Delhi u .....

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return for AY 2007-08 on 31st October 2007 which again was picked up for scrutiny. An assessment order was passed on 29th December 2009 assessing the taxable income at ₹ 36,95,120 as against the declared income of ₹ 36,00,313. 6. The Assessee filed a return of income on 30th September 2008 for AY 2008-09 which was processed under Section 143(1) of the Act. The returned income was ₹ 1,14,96,331. 7. The Assessee filed a return on 29th September 2009 for AY 2009-10. This was picke .....

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notice. 9. By a letter dated 17th September 2013, the AO reproduced the reasons for reopening of the assessment, the relevant portion of which read as under: "The assessee is a Doctor by profession and derived income from proprietary business from M/s. Park Hospital and M/s. Sunil Hospital & Nursing. The assessee filed its return of income on 31.10.2006 declaring the income of ₹ 12,35,268/-. On the basis of information gathered while scrutiny proceedings u/s. 143(3) for A. Y. 2010 .....

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g, unpaid expenses or expenses payable or provision for expenses are not allowed as deductible expenditure. Since, there is an outstanding balance of ₹ 5,97,750/- and ₹ 4,12,215/- in the Sundry creditors and amounts payable respectively in M/s. Park Hospital and M/s. Sunil Nursing Home respectively during the F.Y 2005-06, the same are not an allowable expenditure under Cash system of accounting. Following the mercantile system of accounting, bills raised and accrued income has to be .....

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the part of the assessee to disclose fully and truly all material facts necessary for his assessment. In view of above facts, I have reason to believe that the assessee has income which has escaped from assessment and fit case to issue notice u/s 148 of the I.T Act, 1961. 10. Within three days of the earlier notice, i.e., on 28th March 2013, another notice under Section 148 of the Act was issued by the DCIT seeking to reopen the assessment for AY 2008-09. The same reasons, as extracted hereinbef .....

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reply on 14.03.2013 that he has been following cash system of accounting until F.Y 2008-09 and shifted over to mercantile system of accounting for F. Y. 2009- 10. Assessee during the assessment proceedings of the A.Y. 2007-08 never submitted that he had been following cash system of accounting. It was only during the assessment proceedings of A.Y. 2010-11 that the assessee submitted this fact. Following the cash basis of accounting, sundry creditors and expenses payable are not allowed as deduc .....

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llowable as expenditure, thus, ₹ 30,15,907/- has escaped from assessment. 12. For AY 2009-10, the notice was issued two days later, i.e., on 7th March 2014, again by the ACIT where the reasons were identical for the reasons for AY 2007-08. 13. The Assessee s objection to the reopening of the above assessment were negatived by orders passed by the AO on 13th December 2013 as far as AYs 2006-07 and 2008-09 were concerned and by orders dated 11th March 2015 as far as AYs 2007-08 and 2009-10 w .....

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ned Senior Standing counsel for the Revenue. 16. The main reason for the reopening of the assessment is admittedly the letter given by the Assessee while the assessment for AY 2010-11 was under scrutiny. It is stated that in the reply dated 14th March 2013 addressed to the DCIT in reply to the notice dated 8th March 2013, the Assessee volunteered that we have followed the cash system of accounting until FY 2008-09 and shifted over to mercantile system of accounting for FY 2009-10 (AY 2010-11). T .....

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eing the outstanding balance shown as sundry creditors has escaped assessment and would require to be added back. It is stated that the escapement of income was on account of the failure on the part of the Assessee to disclose fully and truly and material facts necessary for assessment . 18. As far as AY 2006-07 is concerned, it is significant that the assessment order dated 22nd December 2008 itself notes against column 10 as under method of accounting: mercantile . Further in the objections to .....

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ors were examined by the AO during the original assessment proceedings and the books of accounts were also produced. It was pointed out that the mercantile system of accounting was being followed by the Assessee not only during AY 2006-07 but the earlier and subsequent years as well. Counsel for the Assessee has produced before the Court the assessment order dated 17th November 2006 for AY 2004-05 which shows that the method of accounting in the said AY was mercantile . It was explained that the .....

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asis and instead of mixed method it should be treated as mercantile basis . 19. Similar objections were also filed as regards the notices under Section 148 of the Act issued for the other three AYs. As regards AYs 2007-08 and 2009-10, in its objections the Assessee in the letter dated 9th December 2014 pointed out that the letter dated 14th March 2013 was written by the Assessee under some misconception as he "does not understand as what is the mercantile or cash based accounting." It .....

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ts on record. 20. In a further letter dated 9th March 2015, the Assessee pointed out that if the cash system was to be followed for AYs 2006-07 to 2010-11, the overall impact would be nil and there would be no escapement of income. The only controversy was whether income was to be taxed in the first year or the next year and overall it would be tax neutral. There was also no revenue loss as the maximum slab of tax rate in all the AYs was the same, i.e., 30%. It was further pointed out that for A .....

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