2013 (6) TMI 128 - HC - Income Tax

Re opening of assessment - additions in respect of bad debts, unabsorbed depreciation and disallowance under section 14A - Held that - AO had combined the original recorded reasons and the additional reasons and shown it as one set of reasons. The purported recorded reasons dated 19.01.2010 comprise of two paragraphs numbered as 01 and 02 . The purported additional reasons also comprise of two paragraphs 01 and 02 . It is only in the additional reasons, in paragraph 01 that two sub-paragraphs are referred to as (a) and (b) . It is, therefore, clear that the AO has conjured up a different set of reasons by combining the original reasons and the additional reasons allegedly recorded sometime in October 2010. This is impermissible and does not behove of the Assessing Officer who is supposed to be fair to the department as also to the assessee and to be honest to the record. AO was also wrong in stating that the reasons as indicated by him involving three issues had been recorded before issuance of the notice u/s 148. To make it clear, the reasons recorded prior to the issuance of the notice under Section 148 pertained only to the issue of bad debts. The other purported reasons pertaining to the issues of unabsorbed depreciation and disallowance under Section 14A admittedly, recorded after the issuance of notice under Section 148. Thus Tribunal was right in concluding that the proceedings under Section 147/148 were itself bad - in favour of assessee.

Issues Involved:
1. Validity of proceedings under Section 147/148 of the Income Tax Act, 1961.
2. Addition on account of provision for doubtful debts.
3. Addition on account of unabsorbed depreciation.
4. Disallowance under Section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 147/148:
The primary issue examined was whether the proceedings under Section 147/148 were validly initiated. The notice under Section 148, issued on 19.01.2010, was based solely on the issue of doubtful debts. Additional reasons, including issues of unabsorbed depreciation and disallowance under Section 14A, were recorded later in October 2010. The court held that additional reasons could not be recorded after the issuance of the notice under Section 148. The notice must stand or fall based on the reasons recorded prior to its issuance. The court referenced CIT v. Jet Airways, Ranbaxy Laboratories Limited v. CIT, and CIT v. Software Consultants to support this position. Consequently, the proceedings initiated under the notice dated 19.01.2010 were deemed invalid, and any subsequent additions based on additional reasons were impermissible.

2. Addition on Account of Provision for Doubtful Debts:
The original reasons recorded on 19.01.2010 pertained to the issue of provision for doubtful debts. The allegation was that the assessee had deducted Rs. 1,87,41,755/- on account of provision for doubtful debts but had not added this amount to the taxable income in the Profit & Loss Account, resulting in under assessment. However, the Tribunal found that the assessee had not claimed any deduction on account of provision for bad debts. The total deduction claimed under doubtful debts written off was only Rs. 46,37,814/-, which had been accepted by the Assessing Officer in the original assessment. The Tribunal concluded that the reassessment attempt was based on a mere change of opinion and upheld the deletion of the addition made on account of bad debts.

3. Addition on Account of Unabsorbed Depreciation:
The additional reasons recorded in October 2010 included the issue of unabsorbed depreciation. The Assessing Officer contended that the balance unabsorbed depreciation of Rs. 6,85,19,358/- should have been set off against the long-term capital gain of Rs. 14,34,71,150/-. This was not done, resulting in excess carry forward of unabsorbed depreciation. However, since the additional reasons were recorded after the issuance of the notice under Section 148, they were deemed invalid. Consequently, the addition on account of unabsorbed depreciation was also invalidated.

4. Disallowance under Section 14A:
The additional reasons also included the issue of disallowance under Section 14A. The Assessing Officer had disallowed Rs. 16,23,073/- relating to expenditure under Section 14A, which was incorrect as per the provisions of Section 14A read with Rule 8D. The correct figure should have been Rs. 3,17,48,567/-, leading to under assessment of income by Rs. 3,02,90,115/-. However, similar to the unabsorbed depreciation issue, the additional reasons recorded after the issuance of the notice under Section 148 were invalid. Therefore, the disallowance under Section 14A was also invalidated.

Conclusion:
The court concluded that the proceedings under Section 147/148 were invalid as the additional reasons recorded after the issuance of the notice could not be considered. The Tribunal's decision to quash the assessment was upheld. The appeal was dismissed, and no substantial question of law was raised. The court did not examine the merits of the issue regarding the carry forward of unabsorbed depreciation due to the invalidity of the proceedings under Section 147/148.

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