2019 (12) TMI 880 - AT - Income Tax

Re-assessment proceedings initiated u/s 147/148 - HELD THAT - If the recorded reasons shout contradiction and inconsistency it means necessary satisfaction in terms of the statutory provision has not been recorded at all. AO was not competent to continue with the proceeding under section 147 on some other issues or grounds which were not mentioned in the reasons recorded under section 148(2). A plain reading of Explanation (3) to Sec. 147 shows that for the purpose of reassessment u/s 147 the AO can reassess income in receipt of an issue which escaped assessments and such other income which comes to his notice subsequently in the course of proceedings under the said section even though the reasons for such issue/income were not included in the recorded reasons. The explanation (3) however pre-supposes that the issue with reference to which the reason was recorded was found to be legally judicially tenable and with reference thereto the AO is able to prove that income had indeed escaped assessment. It is only when the AO is able to establish valid initiation of reassessment proceedings with reference to the recorded reasons and in the reassessment u/s 147; such income is also assessed; only then the AO will be able to be expand the scope of reassessment proceedings by assessing any other escaped income which comes to his notice in the course of reassessment. If on the other hand the AO is not able to justify the reopening of a concluded assessment with reference to reasons recorded u/s148(2) or where on examination of assessee s submissions AO agrees that on the basis of reasons recorded it cannot be held that income had escaped assessment within the meaning of Sec. 147 then in such an event the very reopening of a concluded assessment stands vitiated and therefore the AO cannot expand the scope of reassessment by including some more issues or reasons which did not find mention in the reasons recorded u/s148(2). For that we rely on the judgment of the Hon ble Bombay High Court in the case of CIT Vs Jet Airways India Ltd 2010 (4) TMI 431 - HIGH COURT OF BOMBAY In view of the facts narrated above and the binding precedents applicable to the facts we are of the view that the reasons recorded are bad in law therefore we quash the reassessment order passed by AO under section 147/148 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of re-assessment proceedings initiated under section 147/148 of the Income Tax Act, 1961.
2. Non-adoption of Accounting Standard-7 (AS-7) and its impact on profit deduction.
3. Application of the percentage completion method for revenue recognition.
4. Alleged insufficient profit offered by the assessee.
5. Non-deduction of TDS on specific expenditures.
6. Discrepancy in turnover figures as per TDS certificate and balance sheet.

Detailed Analysis:

1. Validity of Re-assessment Proceedings:
The primary issue raised by the assessee was the legality of the re-assessment proceedings initiated by the Assessing Officer (AO) under section 147/148 of the Income Tax Act, 1961. The Tribunal examined the reasons recorded by the AO for reopening the assessment and found that none of the reasons had a material basis or a live link to the conclusion of income escapement. The Tribunal emphasized that the reasons recorded must be clear, unambiguous, and based on evidence. In this case, the reasons were found to be based on conjectures and lacked material evidence, leading to the conclusion that the re-assessment proceedings were bad in law.

2. Non-adoption of Accounting Standard-7 (AS-7):
The AO contended that the assessee did not adopt AS-7, which led to an incorrect deduction of real profit. However, the Tribunal noted that the assessee followed the percentage completion method, which is in line with AS-7 for revenue recognition. Therefore, this reason for reopening the assessment was deemed non-existent and without material basis. Additionally, no addition was made on this account in the assessment order.

3. Application of Percentage Completion Method:
The AO's reason for reopening included the assessee's application of the percentage completion method. The Tribunal found that this method was correctly followed by the assessee as per AS-7, and there was no material basis to conclude escapement of income. Thus, this reason was also deemed non-existent and without material basis.

4. Alleged Insufficient Profit Offered:
The AO alleged that the profit offered by the assessee was insufficient. The Tribunal found this to be a baseless allegation without any material evidence. The AO's conclusion was based on conjectures, and no addition was made on this account in the assessment order. Therefore, this reason was also non-existent and without material basis.

5. Non-deduction of TDS on Specific Expenditures:
The AO claimed that TDS was not deducted on certain expenditures, specifically on Hydra Rent and subcontractor payments. The Tribunal noted that the audited accounts and tax audit report indicated that TDS was deducted and deposited as per law. Additionally, the definition of "rent" was expanded only after the relevant assessment year, and there was no obligation to deduct TDS on machinery rent during the assessment year in question. Therefore, this reason was also non-existent and without material basis.

6. Discrepancy in Turnover Figures:
The AO highlighted a discrepancy in turnover figures based on the TDS certificate and the balance sheet. The Tribunal found that the AO's reasoning was based on a misunderstanding of accounting principles. The recorded debtor figure in the balance sheet could not be added to the disclosed turnover to conclude that the turnover was out of books. Therefore, this reason was also non-existent and without material basis.

Conclusion:
The Tribunal concluded that the reasons recorded by the AO for reopening the assessment were either non-existent or without material basis. The re-assessment proceedings were deemed bad in law, and the assessment order was quashed. The appeal of the assessee was allowed, and the re-assessment order passed by the AO under section 147/148 of the Income Tax Act was quashed.