2016 (6) TMI 1025 - HC - Income Tax

Reopening of assessment - Claim of bad debts u/s 36 (1) (vii) - Held that - It was only after such detailed, minute scrutiny that the Assessing Officer, in the order of assessment, had made partial disallowance of the petitioner s claim of deduction of bad and doubtful debts. For all these reasons, therefore, the Assessing Officer cannot be permitted to reopen the assessment, on this very ground, since any such reopening, would be based on mere change of opinion. Deduction of the provision of sales return claimed - Held that - Assessing Officer was completely against the principle of taxing these receipts. The Audit Party was of the opinion that the deduction for provision of sale return was claimed for liability which had not yet arisen nor ascertained. The Assessing Officer was steadfast in his belief that the liability had accrued and it was also ascertained. Under the circumstances, as per the settled law, Notice for reopening could not have been issued. It was not the belief of the Assessing Officer that income had escaped assessment. In fact, he was compelled to go against his own legal belief and issue notice, which was wholly impermissible under law. In fact, the spirited defence put forward by the Assessing Officer before the Audit Party gives credence to the petitioner s contention that his entire claim was minutely examined by the Assessing Officer during the original assessment proceedings. - Decided in favour of assessee

Issues Involved:
1. Validity of reopening the assessment for the Assessment Year 2010-11.
2. Deduction of provision for sales return.
3. Claim of bad debts under Section 36(1)(vii) of the Income Tax Act.
4. Claim of doubtful debts, loans, and advances.

Detailed Analysis:

1. Validity of Reopening the Assessment:
The petitioner challenged the notice dated 24.12.2014 issued by the Assessing Officer to reopen the assessment for the Assessment Year 2010-11. The primary contention was that the notice was issued under the instance of the Audit Party and lacked the independent decision of the Assessing Officer. The petitioner argued that the reopening was based on a mere change of opinion, which is impermissible.

2. Deduction of Provision for Sales Return:
The Assessing Officer noticed that the petitioner had deducted ?1.63 crores for sales return from net sales, which was not an accrued or known liability. The petitioner contended that this claim was scrutinized during the original assessment, and the provision was made based on known liabilities from recalled defective products. However, the court found no direct evidence that this specific claim was discussed during the original assessment. The Audit Party had flagged this as a major irregularity, but the Assessing Officer disagreed, stating the liability was ascertained. The court concluded that the Assessing Officer issued the reopening notice under compulsion from the Audit Party, which is not permissible under law.

3. Claim of Bad Debts under Section 36(1)(vii) of the Income Tax Act:
The Assessing Officer contended that the petitioner wrongly claimed bad debts of ?3.37 crores by writing off from the provision for bad and doubtful debts made in earlier years. The court noted that during the original assessment, the Assessing Officer had scrutinized this claim in detail, requiring the petitioner to provide extensive documentation and justification. The petitioner had provided party-wise details and correspondence with the Reserve Bank of India regarding the write-off. The court held that reopening on this ground would amount to a mere change of opinion, which is not permissible.

4. Claim of Doubtful Debts, Loans, and Advances:
The Assessing Officer also scrutinized the petitioner's claim of ?3.52 crores for doubtful debts, loans, and advances during the original assessment. The petitioner had provided detailed explanations and added back the provisions to the total income in the computation. The court observed that this claim was also scrutinized and partially disallowed during the original assessment, thus reopening on this ground was based on a change of opinion.

Conclusion:
The court quashed the impugned notice for reopening the assessment, holding that it was not based on the Assessing Officer's belief that income had escaped assessment, but rather on the Audit Party's insistence. The court emphasized that reopening based on a mere change of opinion or under compulsion from the Audit Party is impermissible under the law. The petition was allowed and disposed of.

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