2013 (5) TMI 332 - HC - Income Tax

Reopening of assessment u/s 148 As per the AO amount received for prepaid services at the time of purchase of the recharge is not an advance which could be appropriated against future use of service but the income crystallized as soon as the payment was made by the customer. - Held that - In the original assessment, the AO asked the assessee to furnish details of advance income and the corresponding expenditure incurred. The petitioner pointed out that the company follows mercantile system of accounting and such principles regularly followed by the petitioner, revenue is recognized only when the customer actually uses the network of the company and services are actually rendered to the customers. It was therefore clarified that the incomes received in respect of which services are not rendered during the year are accounted for in the balance sheet as advance income. The assessee thereafter proceeded to explain that the expenditure relateable to such incomes would be available deduction during the year itself. AO in his detailed reasoned order of assessment, gave reasons for disallowing expenditure relateable to such advance income. He concluded that the assessee in the books recognizes this expenditure as current liabilities but the corresponding services are to be offered in the next financial year. He therefore held that, the expenditure not relateable to the earning of income naturally has to be allowed in the year in which the corresponding income is offered to tax . He thus proceeded on the basis that the income in question would be taxed in the future years and that therefore, expenditure relateable to such income cannot be a valid deduction in the current year. Thus AO having examined the nature of receipts and the corresponding expenditure in the original assessment, now cannot be permitted to change his view with respect to the nature of treatment such receipts must receive. AO made no additions on the count that the payments towards re-charges were not advance but accrued income and made disallowances of the expenditure pro-rata relatable to such income deferred by the assessee to be accounted for in the future years. Thus, impugned notice is quashed.

Issues Involved:
1. Validity of the notice for reopening the assessment under Section 148 of the Income Tax Act.
2. Whether reopening the assessment amounts to a change of opinion.
3. Examination of the original assessment proceedings and the treatment of "Advance Income."
4. Application of judicial precedents on the issue of reassessment and change of opinion.

Detailed Analysis:

1. Validity of the Notice for Reopening the Assessment:
The petitioner challenged the notice dated 17th October 2011 issued by the Assessing Officer (AO) for reopening the assessment for the Assessment Year (A.Y.) 2008-09. This notice was issued within four years from the end of the relevant assessment year. The AO recorded reasons for issuing the notice, focusing on the treatment of "Advance Income" from prepaid cellular services, which the AO believed should be recognized as income when received, not as an advance.

2. Whether Reopening the Assessment Amounts to a Change of Opinion:
The petitioner argued that the original assessment was completed after scrutiny, where the AO had examined the claim in question. Reopening the assessment at this stage, according to the petitioner, would amount to a change of opinion, which is not permissible. The petitioner relied heavily on the Supreme Court's decision in CIT v. Kelvinator of India Ltd., which held that mere change of opinion cannot justify reopening an assessment.

3. Examination of the Original Assessment Proceedings:
During the original assessment, the AO had raised queries regarding the details of advance income and corresponding expenditure. The petitioner provided a detailed explanation, stating that revenue is recognized only when services are rendered, and hence, advance payments are shown as current liabilities. The AO, in the assessment order dated 30th December 2010, disallowed a proportionate amount of expenditure related to the advance income, indicating that the income would be recognized in future years.

4. Application of Judicial Precedents:
The court examined several judicial precedents to determine the legality of reopening the assessment:

- Kelvinator of India Ltd. Case: The Supreme Court emphasized that post-1989, the AO has wider powers to reopen assessments, provided there is "tangible material" indicating escapement of income. However, the concept of "change of opinion" remains a crucial check against arbitrary reopening of assessments.

- Gujarat Power Corpn. Ltd. Case: The Division Bench held that if the AO raises queries and receives replies during the original assessment but does not make any additions, it implies that the AO formed an opinion. Reopening the assessment on the same grounds would then be impermissible.

- Usha International Ltd. Case: The Full Bench of Delhi High Court held that reassessment is invalid if the AO had raised and addressed queries during the original assessment but did not make any additions.

- Export Credit Guarantee Corpn. of India Ltd. Case: The Bombay High Court held that reopening within four years is permissible if there is tangible material indicating escapement of income, even if such material was part of the original assessment record.

Conclusion:
The court concluded that the AO had examined the nature of receipts and corresponding expenditure during the original assessment. The AO's current stance, which contradicts his earlier position, amounts to a change of opinion. Therefore, reopening the assessment within four years is not permissible. The impugned notice for reopening the assessment was quashed, and the petition was allowed.

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