2011 (11) TMI 506 - HC - Income Tax

Reopening of assessment - income escaped assessment on ground that following mercantile system of accounting retention money is required to be taxed in the year in which bills are raised - Held that - Scrutiny on issue which has been held in favor of the assessee in earlier AY and the assessee has followed uniform pattern of offering retention money received in the year of its receipt, year after year and in all previous years, the stand of the assessee has been accepted. Therefore, notice cannot be sustained in law and the same is, therefore, quashed - Decided in favor of the assessee

Summary

Issues:
1. Validity of reopening assessment based on the treatment of retention money.
2. Principle of merger in relation to the pending appeal before the Commissioner.
3. Taxability of retention money in the year bills are raised.

Analysis:

Issue 1: Validity of reopening assessment based on the treatment of retention money
The petitioner challenged a notice for reopening the assessment for the assessment year 2006-07. The Assessing Officer believed that income chargeable to tax had escaped assessment due to the treatment of retention money. The petitioner argued that the issue of retention money was thoroughly discussed during the original assessment, and the Assessing Officer did not object to the accounting method used by the petitioner. The petitioner contended that reopening the assessment would amount to a change of opinion. The High Court noted that the entire issue had been decided in favor of the assessee up to the High Court level in previous years. Therefore, the court quashed the notice for reopening the assessment.

Issue 2: Principle of merger in relation to the pending appeal before the Commissioner
The petitioner's counsel argued that since the assessment order was in appeal before the Commissioner, the principle of merger applied, and the Assessing Officer could not reopen the assessment on the same issue. However, the Revenue contended that the treatment of retention money was not at issue in the original assessment, and the notice for reopening was valid. The High Court did not delve into this contention as the main issue had already been decided in favor of the assessee in previous years.

Issue 3: Taxability of retention money in the year bills are raised
The central controversy revolved around the treatment of retention money by the assessee. The Assessing Officer believed that the retention money should have been included in the assessee's receipts for the relevant year. However, the assessee argued that the right to receive retention money did not accrue until the completion of the work, and therefore, it was not reflected in the accounts. The High Court referred to previous years' cases where similar issues had been raised and decided in favor of the assessee. As a result, the court quashed the notice for reopening the assessment.

In conclusion, the High Court ruled in favor of the assessee, quashing the notice for reopening the assessment based on the treatment of retention money. The court emphasized that the issue had been extensively discussed in previous assessments and decided in favor of the assessee.