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2010 (3) TMI 164 - HC - Income TaxReassessment - there is escapement of income of ₹ 36, 21,500 and accordingly it is a fit case for reopening under section 147 of the Income-tax Act, 1961, within the time limit of four years from the end of the relevant assessment year. Hence, the assessment for the assessment year 2004-05 is hereby reopened. There are two reasons on the basis of which reopen the case- The first relates to the write off of bad debts in the amount of ₹ 6.46 crores. The second relates to the computation of book under section 115JB. Held that- (i) during the course of assessment proceedings, the assessment officer brought his mind to bear upon the question as to whether the assessee was entitled to claim a deduction under section 36(1)(vii), with respect to bad debts, details of which were furnished to the assessing officer, pursuant to which an assessment order came to be passed to reopen the assessment was that the assessee had not debited any amount towards the write off of debts/advances to the profit and loss account. Such requirement is not contained in section 36(1)(vii). There was an absence of tangible material on the basis of which the assessment could have been reopened. The reopening on this ground is unsustainable. (ii) In the light of the various judgment held that there was no warrant for reopening the assessment in exercise of the power conferred u/s 147.
Issues Involved:
- Reopening of assessment under Section 148 of the Income Tax Act, 1961. - Allowability of bad debts under Section 36(1)(vii) read with Section 36(2). - Computation of book profits under Section 115JB. Detailed Analysis: Reopening of Assessment under Section 148: The petitioner challenged the notice issued on July 18, 2008, for reopening the assessment for the assessment year 2004-05, and the subsequent order dated November 30, 2009, disposing of the objections to the reopening. The basis for reopening was the alleged escapement of income due to incorrect allowance of bad debts and improper computation of book profits. Allowability of Bad Debts: 1. Initial Assessment and Appeals: - The petitioner filed its return declaring a loss of Rs. 52.87 crores and claimed a deduction for bad debts amounting to Rs. 12 crores. - The Assessing Officer (AO) disallowed Rs. 5.54 crores but allowed Rs. 6.46 crores. - On appeal, the Commissioner of Income-tax (Appeals) allowed the entire claim of Rs. 12 crores. 2. Reopening Grounds: - The AO reopened the assessment on the grounds that the petitioner had not debited any amount for bad debts in the profit and loss account and had claimed bad debts by debiting the provision for doubtful debts and advances. 3. Petitioner's Argument: - The petitioner argued that the AO had already scrutinized the bad debts claim during the initial assessment. - The write-off was made out of debtors provided in earlier years, and the statute does not require the write-off to be reflected in the profit and loss account for the assessment year in which the deduction is claimed. 4. Court's Analysis: - The court noted that the AO had applied his mind to the bad debts claim during the initial assessment. - The reopening was based on a mere change of opinion, which is not permissible without tangible material. - The court cited the Supreme Court's judgment in CIT v. Kelvinator of India Ltd., emphasizing that a mere change of opinion does not justify reopening. 5. Conclusion: - The reopening of the assessment on the grounds of bad debts was unsustainable as it was based on a mere change of opinion without any tangible material. Computation of Book Profits under Section 115JB: 1. Initial Assessment and Appeals: - The AO computed the book profits under Section 115JB but did not consider certain provisions for doubtful debts, advances, and diminution in the value of investments. 2. Reopening Grounds: - The AO reopened the assessment, stating that the petitioner had not considered these provisions while computing book profits. 3. Petitioner's Argument: - The petitioner argued that the AO's view was consistent with the prevailing law, as interpreted by the courts, which held that provisions for doubtful debts and advances did not fall within the purview of clause (c) to Explanation (1) to Section 115JB. 4. Court's Analysis: - The court referred to the Supreme Court's judgment in CIT v. HCL Comnet Systems and Services Ltd., which held that provisions for doubtful debts are not provisions for liabilities and, thus, do not fall under clause (c) of Explanation (1) to Section 115JB. - The court noted that the legislative amendment by the Finance Act of 2009, which included provisions for diminution in the value of assets under clause (i) to Explanation (1), was enacted after the AO had issued the notice for reopening. 5. Conclusion: - The court held that the reopening of the assessment on the grounds of computation of book profits was unwarranted, as the AO's initial view was consistent with the prevailing judicial interpretation. - The subsequent legislative amendment could not justify the reopening. Final Judgment: The court set aside the notice dated July 16, 2008, and the order rejecting the objections dated November 30, 2009. The petitioner succeeded in the proceedings, and the reopening of the assessment was deemed unsustainable. There was no order as to costs.
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