2021 (10) TMI 238 - HC - Income Tax

Reopening of assessment u/s 147 - retention money for the completed projects - mercantile system of accounting - whether there was an allegation that the assessee failed to fully and truly disclose all material facts and particulars at the first instance, when the assessment was completed? - HELD THAT - As after completion of the assessment u/s143(3) of the Act, the AO has issued notice seeking certain clarifications - no power vested with the AO to seek such clarifications, as the AO does not possess power under Section 154 - assessee has furnished the reply and the reply specifically stated that the retention money has already been offered to tax in the subsequent period. Hence, charging to tax will not be in compliance of the Accounting Standards and the provisions of the Act and the same income cannot be taxed twice. Concept as to why the retention money is retained by the assessee was explained by stating that the retention money accrues only after the defect liability period is over, which is generally one year after the execution of works contract and until the project is not completed, there is no right to receive the money. When there is no right to receive the money, the income does not accrue or arise to the assessee. Further, if this income has not been offered at the time of execution of the contract it is not possible, since the quantum of how much amount would be known only after the defect liability period. As pointed out that the assessee has been consistently following the same method of accounting for the last twenty five (25) years and there is no change in the method of accounting is warranted on a continuing job. Thus, it is clear that the Assessing Officer seeks to review the decision taken by its predecessor in office under the guise of exercise of power under Section 147/148, which is impermissible under law. On facts we have satisfied that there is no allegation against the assessee on any failure on his part to disclose full particulars at the time of original assessment, nor there is any fresh tangible material brought out by the assessee on record justifying his exercise of power under Section 147 of the Act. Therefore, we hold that the reopening proceedings is bad in law. - Decided in favour of assessee.

Issues Involved:
1. Challenge to the reopening of assessment for the assessment year 2011-12.
2. Allegation of change of opinion by the Assessing Officer.
3. Legality of treating retention money as income.
4. Consistency in the method of accounting for retention money.
5. Compliance with Accounting Standards and Income-tax Act regarding retention money.
6. Requirement of tangible material for reopening the assessment.

Detailed Analysis:

1. Challenge to the reopening of assessment for the assessment year 2011-12:
The appellant challenged the reopening of the assessment for the assessment year 2011-12 on the grounds that it was a case of change of opinion. The initial assessment was completed on 31.03.2014, and the reopening notice under Section 148 was issued on 29.03.2018, beyond the four-year period. The court emphasized that for reopening beyond four years, there must be a failure on the part of the assessee to fully and truly disclose all material facts.

2. Allegation of change of opinion by the Assessing Officer:
The appellant contended that the reopening was merely a change of opinion since the Assessing Officer had already scrutinized the details during the original assessment. The court noted that the Assessing Officer did not form any opinion on the issue of retention money during the original assessment, and thus, there was no change of opinion.

3. Legality of treating retention money as income:
The appellant argued that retention money should not be considered as income until the contractual obligations were fully performed and the defect liability period was over. The court referred to previous judgments, including CIT Vs. Kelvinator of India Ltd and Commissioner of Income-tax -vs- Ignifluid Boilers (I) Ltd, which supported the appellant's stance that retention money does not accrue as income until the conditions for its release are met.

4. Consistency in the method of accounting for retention money:
The appellant maintained that they had consistently followed the same method of accounting for retention money for the past 25 years. The court found that there was no necessity to change the method of accounting, as the appellant had been consistent in their approach.

5. Compliance with Accounting Standards and Income-tax Act regarding retention money:
The appellant argued that charging retention money to tax before it becomes due would not comply with the Accounting Standards and the Income-tax Act. The court agreed, noting that taxing the same income twice would be against the principles of the Act.

6. Requirement of tangible material for reopening the assessment:
The court observed that there was no fresh tangible material available with the Assessing Officer to justify the reopening of the assessment. The court concluded that the reopening proceedings were bad in law as there was no failure on the part of the assessee to disclose full particulars during the original assessment.

Conclusion:
The court allowed the appeal, set aside the order dated 26.04.2021, allowed the writ petition, and quashed the notice issued under Section 148 and the consequential proceedings. The court emphasized that the reopening of the assessment was not justified as it was based on a change of opinion without any tangible material. The court also highlighted that the legal issue regarding the treatment of retention money was settled in favor of the assessee by previous judgments.

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