TMI Blog2016 (8) TMI 1550X X X X Extracts X X X X X X X X Extracts X X X X ..... But, at present it is sufficient to say that re-opening should be done only in certain circumstances, as envisaged by the section. The entire approach of the AO and the FAA, in the background of the present case, is misconceived. The re-assessment order is based on allowability of provision of bad and doubtful debts. Perusal of the assessment order reveals that such details were called for by the AO. It is further found that the details of the provisions for bad and doubtful debts furnished by the assessee were scrutinized during the original assessment proceedings. In the notes accompanying the return of income the assessee had specifically mentioned the fact and basis of treating the amount in question in a particular manner - there does not appear to the tangible material/reason for the AO to reopen the assessment proceedings in the facts of the present case. He himself admits that scrutiny of the records revealed that there was escapement of income. So, the reasons, recorded by him, have to be analysed considering the post scrutiny events. AO was not convinced about the reasons given by the audit party for disallowing the claim. Not only he stated that claim was sustain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank filed its return of income on 29.09.2008 declaring income of ₹ 320.87 crores. The original assessment u/s.143(3) was completed on 15.11.2010 determining income of the assessee at ₹ 337.70 crores. Later on a notice u/s.148. dt. 5.03.2013 was issued to the assessee. The AO completed the assessmnet u/s.143(3) r.w.s. 147 of the Act on 17.02.14, assessing the income of the assessee at ₹ 342.91 crores. ITA/1991/Mum/2015 (Assessee s Appeal): 2. First Ground of appeal is about re-opening. In response to notice u/s.148, the assessee had filed return of income on 07.10.2013. It made a request to the AO to provide it the copy of reason recorded. The reasons recorded by him for reopening the assessment read as under: In this case it is found that assessing officer determined assessed income of ₹ 3,37,70, 08,315/-after disallowance of Provision on investment, under section 14A and disallowance u/s. 35D. Audit scrutiny of computation of income revealed that assessee has claimed deduction u/s. 36(l)(viia) for an amount of ₹ 200734588/- and the same as allowed by the department as given below. A.Y.2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32892000/- However, while determining the assessed income, Assessing Officer disallowed only ₹ 3,28, 92,000/- in respect of share issue expenses and Preliminary expense of ₹ 5677691/- has not added back to the income. Therefore, I have reason to believe that the income of the assessee chargeable to tax, has escaped assessment/or A.Y. 2008-09. Notice u/s./48 is separately issued. After getting the copy of the reasons, the assessee vide its letter dated 25/10/ 2013 raised objections against the notice issued u/s. 148. The AO passed an order and rejected the objections raised by it vide order dated 30.12.13. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, it was argued that during the original assessment proceedings, the AO had asked the assessee to furnish details of outstanding balance of provision for bad and doubtful debts created u/s.36(1)(viia), that he had formed an opinion about the allowability of the item, that the assessee had also furnished submission with regard to claim made u/s. 35D of the Act, that the deduction claimed in computation of income was part of the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere change of opinion and was bad in law, that the assessment was reopened under section 147 of the Act without any new tangible material, that the re-opening was bad in law as the same was based on an audit objection, that reopening was not justified as same was revenue neutral. She relied upon the cases of kelvinator of India Ltd.(320 ITR 561); Prima Paper Engineering Industry (364 ITR 222); NDT Systems (363 ITR 603); Amitabh Bachhan (349 ITR 76); Heavy Metal and Tubes Ltd. (364 ITR 609); India Eastern Newspaper Society (119 ITR 996); DRM Enterprises (230 taxman 61); ICICI Home Finance Co. Ltd. (210 Taxman 67); Excel Industries Ltd.(358 ITR 295)and Glaxo Smithkline Asia(195taxman35). She also referred to the page No.63, 137, 138, 112,113 of paper book . The Departmental Representative (DR) stated that it was not a case of change of opinion, that there were no bad debts, that assessee was not operating in the rural areas, that bad debts had to be written off as irrecoverable as per the provisions of the Act, that the bank had followed the RBI Guidelines, that there was no bar in the Act for not relying upon the audit objections, audit objection was one of the sources of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsistency in treatment. In the case of P.C. Patel Co.(379 ITR 151) the Hon ble Gujarat High Court has dealt the issue of audit objections as follow: Information given by the audit party or an audit objection can be used for the purpose of reopening of the assessment. However, for that there must be formation of opinion by the Assessing Officer or the Assessing Officer independently must have reason to believe that the income chargeable to tax has escaped assessment. from the correspondence between the AO and the higher authority showed that though the AO maintained that the audit objection raised by the audit party was not correct, however as the amount involved was very high as mentioned by the audit party and to safeguard the interests of the Revenue and the guidelines issued the reassessment proceedings have been initiated. Therefore, the formation of the opinion by the AO that the income chargeable to tax had escaped assessment was vitiated the reopening of the assessment could not be sustained and deserved to be quashed and set aside. Now, we would like to refer to Xerox Modicorp Ltd.(350 ITR 308) of the Hon ble Delhi High Court. In that matter th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of the expenditure-whether it is revenue or capital. The audit objection was an inference that the royalty payment resulted in a capital benefit ; such an opinion expressed by the audit could not constitute tangible material on the basis of which the assessment could be reopened. Therefore, the notice within the period of four years from the end of the AY.2004-05 was not valid. 17. It is difficult to sustain the notice issued u/s. 148. The audit objection is only an inference that the royalty payment resulted in a capital benefit ;such an opinion expressed by the audit cannot constitute tangible material on the basis of which the assessment can be reopened. In the case of Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC), the Supreme Court expressed the view that information as to correct legal position must come from a formal source or body which is competent to pronounce upon the issue and that the Revenue audit is not competent to pronounce on issues of law. There is no averment that the Revenue audit only pointed out to any factual aspect or material or primary fact that was omitted to be disclosed by the petitioner. 20. In the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... original files to demonstrate the independent formation of opinion by the AO though sufficient time was made available, the issue stood firmly concluded in favour of the assessee. The reassessment notice was not valid. In the case of IOT Infrastructure and Energy Services Ltd.(332 ITR 587), the Hon ble Bombay High Court has also dealt the similar issue. Facts of the case were that in its balance sheet as of 31.03.2004, the assessee made a provision for diminution in the value of assets of ₹ 1.41 crores under the head of operating and other expenses. In item 17 of the tax audit report u/s. 44AB, the assessee disclosed that an amount of ₹ 1.12 crores was a write down in the value of assets and that this excluded an amount of ₹ 29.23 lakhs which was a write down in the value of slow/non moving inventory valued at estimated realizable value being considered as not in the nature of capital expenditure. The AO reopened the assessment on the ground that the assessee had debited a provision amounting to ₹ 1.41 crores on account of diminution in the value of assets which in his view was not a proper charge on profits as the amount represented a provision made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a write down in the value of inventory could never be regarded as of capital nature. The AO did not deal with the submission of the assessee while disposing of the objections. As a matter of fact, in his response to the audit objection he AO had stated, as regards the amount of ₹ 29.23 lakhs, that it was mentioned in item 17 of the audit report that the estimated realizable value of the inventory was considered not in the nature of capital expenditure . In the circumstances, the reopening of the assessment was not founded on tangible material and the AO had acted outside the fold of his jurisdiction. Now, we would refer to the judgment of Transworld International Inc. (273 ITR 242), of the Hon ble Delhi High Court. Facts of the case were that the petitioner, a non-resident foreign company, was engaged in the business of producing television programmes primarily of sport activities. For the AY.1997-98 a return of income u/s. 139(1) of the Act was filed declaring an income of ₹ 95,59,750/- wherein a claim was made for depreciation @ 25%, amounting to ₹ 1,36,00,682/- on plant and machinery valued at ₹ 5,44,02,729/-. The return of income was processe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Auditor-General, they perform essentially administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of the income-tax authorities. The Income-tax Act does not contemplate such power in any internal audit organisation of the Income-tax Department but only in those authorities which are specifically authorised to exercise adjudicatory functions. The Hon ble Apex court, in the case of Indian and Eastern Newspaper Society (supra), had an occasion to consider the question of basing a notice on an audit report. It had observed as under: For the purpose of imposing a check over the arithmetical accuracy of the computation of income and the determination of tax, internal audit organisation was set up. From 1960 onwards the audit was entrusted to the Comptroller and Auditor General of India. The nature and scope of receipt audit are defined by section 16 of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. The audit by the Comptroller and Auditor General, as pointed out by the apex court, is principally intended for the purpose of satisfying him with regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a recent decision of this court in the case of Adani Exports v. Deputy CIT [1999] 240 ITR 224, it is seen that the Central Board of Direct Taxes has issued some internal directions to the Assessing Officers to initiate remedial measures by way of reassessment in all cases where audit objection are raised. While dealing with such a situation, the court referred to and applied the ratio of the Supreme Court decision in the case of Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 After extracting the relevant portion from the apex court decision, this court has referred to the facts in detail. Thereafter, the court went on to deal with the Central Board of Direct Taxes instructions as under (page 231) : 'Notwithstanding this clear position of law emerging from the decision of the Supreme Court, the instructions of the Board still persisted that as soon as audit objections are raised, prompt remedial action in the nature of reassessment should be taken even if objection is not accepted by the Income-tax Officer. The instructions are being taken for remedial action, viz., remedial action should invariably be initiated as a precautionary measure in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a possible view the order cannot be changed by way of exercising the jurisdiction of rectification of mistake. It is a well settled principle of law that what cannot be done directly cannot be done indirectly. If the Income-tax Officer does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to initiating a proceeding of reassessment or by way of rectification of mistake. In a case of this nature the Revenue is not without remedy. Section 263 of the Act empowers the Commissioner to review an order which is prejudicial to the Revenue. Another aspect of the matter also cannot be lost sight of. A statute conferring an arbitrary power may be held to be ultra vires article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality, it is trite, should be favoured. In the event it is held that by reason of section 147 if the Income- tax Officer exercises his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional. We are therefore of the opinion that section 147 of the Act d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken and this is nothing but a mere change of opinion and that would not amount to escapement of income. Mere change of opinion would not confer jurisdiction upon the AO to initiate proceedings u/s. 147 of the Act..... In the case of G. Ameer (150 ITR 443) the Hon ble Kerala High Court has dealt with audit objections and their relevance in following manner: Where an assessment is sought to be reopened on the basis of information furnished by audit objection, if what was supplied by the audit party was merely information and the assessing authority treated it as such information and proceeded to assess, there would be no objection to such a course. If, on the other hand, the audit party expressed a view on the materials and the assessing authority adopting that view decided to reopen the assessment, that might be objectionable. The assessing authority would then be acting not upon any information but upon the view expressed by the audit party. The Hon ble Gujarat High Court has in the matter of Aryodaya Spinning and Weaving Company Limited(144 ITR 817) found that the assessee-company was engaged in the business of manufacturing textiles, that it was following the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sure of the primary facts at the time of the original assessment. Once he has done that, his duty ends. It is for the ITO to draw correct inferences from those primary facts. It is not the responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts. If the ITO draws an inference which appears subsequently to be erroneous a mere change of opinion with regard to that inference would not justify the initiation of action for reopening assessments under s. 147(a). It would not be open to the ITO to reopen the completed assessment upon a reappraisal of the material considered by him during the original assessment. An error discovered on a reappraisal of the same material without anything more does not give him the power to reopen the assessment under s. 147(b).(emphasis by us). . on the facts and circumstances of the case, the appendage or label which the petitioner gave to the method of valuation of stock of yarn was not by itself a primary fact necessary for assessment. Even assuming it was a primary fact, the petitioner had simultaneously placed on record in the form of a statement the details or particulars i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of legal expenses. The audit department had not pointed out any binding judgment of a High Court or the Supreme Court on this aspect nor had it pointed out any statutory provision which the ITO may have missed on the earlier occasion. Therefore, the ITO had no jurisdiction to reopen the assessment on this ground. The ITO had allowed deduction of gratuity after considering the relevant provisions. On receipt of the audit objection the ITO held that his earlier view was not correct. That could not be called information within the meaning of s. 147(b). The notice of reassessment was invalid and liable to be quashed. 5.2. We would like to refer to some of the matters dealing with the concept of change of opinion, as the courts are unanimous that re-assessment proceedings, initiated because of change of opinion, have to be quashed. Facts of the first case i.e. Central Warehousing Corporation Ltd. (382 ITR 172)were that the assessment of the assessee for the AY.2005-06 was completed u/s.143(3) of the Act. The AO subsequently reopened the assessment on the ground that he had inadvertently failed to notice that income of the assessee from the disposal of stocks in the bonded wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, whether or not he had recorded his reasons in the assessment order. 5.3. The facts of the above case were that the assessee was a company incorporated in the U. S. A. and was a tax resident of the U. S. A. During the relevant financial years, it derived income from the grant of exclusive rights to TIIPL in India to sell advertising on the products and to distribute certain products. It filed its returns for the AY.s.2007-08 and 2008-09. The assessments were made and the AO in the assessment orders had referred to the mutual agreement to avoid double taxation under article 27 of DTAA between India and the U. S. A, for the AY.s.2001-02 to 2004-05 and the fact that subsequently for the AY.2005-06, assessment was concluded following the mutual agreement procedure. The AO in the assessment order had specifically recorded that since the facts of the year under consideration remained the same, following the agreement reached by the respective competent authorities in the earlier years, the tax was computed at 10% according to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany engaged in the business of software development. For the AY.2003-04, in its return of income it had claimed deduction u/s. 10A of the Act. The return of income was processed and selected for scrutiny. While claiming the deduction the assessee had excluded the expenses incurred in foreign currency for providing technical services and had included the profits derived from technical services in the eligible profits for deduction u/s.10A. The claim was allowed. Thereafter, notice was issued and reassessment was completed excluding the profits derived from technical services from the eligible profits. The Tribunal annulled the reassessment proceedings. On appeal to the High Court, the matter was decided as follow: .. it could be seen from the original assessment records that the claim of the assessee under section 10A was thoroughly scrutinised, the Assessing Officer had examined the claim of expenditure incurred in foreign currency for providing technical services allocating the sum of ₹ 38,51,45,781 between the five software technology park units in the ratio of the export sales. In fact, the Assessing Officer had raised certain queries during the assessment proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance with the scheme of the law. There cannot be arbitrary powers to the Assessing Officer to reopen assessment on the basis of mere change of opinion. The Assessing Officer has no power to review. He has only a power to reassess. In the garb of reopening the assessment review cannot take place .. Having regard to the purpose of the section, we are of the view that the power conferred by section 147 does not provide a fresh opportunity to the Assessing Officer to correct an incorrect assessment made earlier .. The decision to reopen assessment was not based on proper reasons but obviously was a result of change of opinion. This was impermissible. The notice of reassessment was not valid and was liable to be quashed. 5.5. In our view, the entire approach of the AO and the FAA, in the background of the present case, is misconceived. The re-assessment order is based on allowability of provision of bad and doubtful debts. Perusal of the assessment order reveals that such details were called for by the AO. It is further found that the details of the provisions for bad and doubtful debts furnished by the assessee were scrutinized during the original assessment proceedings. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B 21139888 Nil Nil Total Provisions (C)=A+B 200734588 254229012 72962742 Total income before deduction D 3409899537 1682358394 831125223 7.5% 255742465 126176880 62334392 Deduction u/s.36(1)(viia) lower C and D 200734588 126176880 62334392 It could be seen from the above that assessee is regularly creating provision for standard assets/advances (see note forming part of the accounts 18.4.3) under the head General 10 provision excluding Provision for NPA and claiming 36(1)(viia) on that from the last three assessment years. Thus, assessee banking company is simply putting aside money by creating provision for standard asset/advances to meet unascertained liability that may become expenditure on the happening of an event in future( last three-years not bad debts) which is inadmissible deduction and contradictory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure of ₹ 28,388,454 was incurred before the commencement of business, as per Sec 35D (1) (i), 1/5th of amount of preliminary expense can be claimed over a period of 5 years. Accordingly, one fifth of the amount i.e. ₹ 5,677,691/- has been claimed in the tax returns for periods commencing Assessment Year 2005-06 to 2009-10 (ii) Provision for Standard Asset Reserve Bank of India ( RBI ) has issued various circulars on prudential norms Income Recognition, Asset Classification and Provisioning pertaining to Advances. These circulars also prescribe the provisions to be made in respect of Non PerformingAdvances ( NPA s). NPAs 'are further classified as Sub-Standard, Doubtful and Loss Advances. Apart from NPAs, RBI circulars also prescribe provisions to be made in respect of Standard Advances, i.e. advances other than NP As. As per current regulations, Banks are required to make a general provision 0.40% and in case of sensitive advances like personal loans, capital markets, real estate, there are higher%'s prescribed which at present is 2%. Requirement of additional provisioning is to reduce the risk in the case of growth in the balance sheet and serves as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Guidelines issued by the Reserve Bank of India ) (A) 179,594,700 Provision for Non-Performing assests(as per the Guidelines issued by the Reserve Bank of India)..(B) 21,139,888 Total Provision (C)= (A)+(B) 200,734,588 Total Income (computed before making any deduction under this clause and Chapter VIA) (D) sec 36(1)(viia)-Refer computation of Income 3,409,899,537 7.5% 255,742,465 Deduction under section 3691)(viia) Lower of (C) and (D) 200,734,588 In assessment year 2009-201Q and 2010-2011, when certain bad loans which were written off, the benefit for the actual write-off of debts was taken only after reducing the balance under Sec 36 (1) (viia) (which included the above mentioned balance) and the workings are given below: Financial Year Claim in the return under Sec.36(1)(viia) 2005-06 62,334,392 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... field formation and at that time Circular no.9/2006 was very much there. The said circular had tied down the hands of the AO.s. There was no option with the them at that time. Once they received an objections from the audit wing, they had to take a remedial actions compulsorily. In short, the AO had invoked the provisions of section 147 of the Act not because he was convinced about the escapement of income, but because he had no alternative. 5.6. In the earlier part of our order, we have deliberated upon the cases dealing with audit objections. From the said discussion it is clear that the quasi judicial powers of the AO cannot be curtailed by circulars or instruction of the CBDT. The Board(CBDT) vide its Cir. No. 8/2016(dated-17.3.2016) has modified the Instruction No.9 of 2006. By issuing the said Circular the CBDT has followed the observations of the Hon ble Gujarat High Court in the case of Seth Brothers(supra)and has restored back the earlier position i.e., that if the departmental authorities are not satisfied about the correctness of the objections, they need not to take any remedial action. In short, the instruction has done away with compulsory initiation of remedial a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nning and Weaving Company Limited (supra) and Aroni Commerci-als Ltd. supra), we hold that the order of the FAA cannot be endorsed. The facts and circumstances reveal and we are satisfied that in the present case, the order of reopening of the assessment was not be justified. The decision to reopen the assessment was not based on proper reasons, but was obviously a result of change of opinion- it was solely based on the audit objection. This is impermissible and therefore not valid. We would like to refer to the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra). In that case it was found that the return was processed u/s. 143(1). The AO issued a notice u/s.148 on the basis of an audit objection and the matter travelled upto the Hon'ble Supreme Court . Deciding the case, the Hon ble Court held as under :- Under the scheme of section 143(1) of the Income-tax Act, 1961, as substituted with effect from April 1, 1989, and prior to its substitution with effect from June 1, 1999, what were permissible to be adjusted under the first proviso to section 143(1)(a) were : (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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