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TMI Blog2020 (5) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... hreshold of Rupees ten lakhs for application of section 44AB of the Act for the year under consideration. Therefore, tax audit provisions are not applicable to the assessee. Expenditure on bank charges and printing stationery are routine expenditure, the expenditure debited under the account-head 'legal expenses' have been incurred by the Firm for the purpose of representation inter alia before the ICAI, New Delhi in the matter of audit carried out by the Firm of erstwhile Global Trust Bank for the financial year 2002-03. The expenses debited under the account head External Consultants Professional fees have been incurred for drafting and amending legal agreements including non-compete agreements etc. AO was of the view that assessee made provisions - We note that none of the expenditure aggregating are in the nature of provision as alleged. These expenses have been disclosed in the return of income filed by the assessee u/s 139 therefore it is not a new tangible material to reopen the assessment u/s 147. So far this issue/ item is concerned there is no tangible material before the AO to frame reason to believe that income has escaped assessment, hence reassess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER PER DR. A. L. SAINI, AM: The captioned appeal filed by the assessee, pertaining to Assessment Year 2009-10, is directed against the order passed by ld. Commissioner of Income Tax (Appeals)-6, Kolkata dated 17.07.2018 which in turn arises out of an assessment order passed by Assessing Officer u/s 147/143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) dated 26.02.2015. 2. The grounds of appeal raised by the assessee are as follows: 1(a). On the facts and in the circumstances of the case, Ld. Commissioner of Income-tax (Appeals) ['Ld. CIT(Appeals)'] erred in confirming the action of the Ld. Assessing Officer ['Ld. AO'] in reopening the assessment under section 148 of the Act and hence the impugned reassessment is bad in law, void-ab-initio and liable to be quashed. 1(b). On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) failed to appreciate that the Ld. A.O failed to record valid reasons in the eyes of law which were modified and altered by him while disposing the objection of the Assessee, and hence the impugned reassessment proceeding is bad in law and deserves to be quashed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act. That means the amount of ₹ 10,60,834/- shown as professional receipt is not assessable under the head business or profession, it is assessable as income from other sources. Against this receipt of ₹ 10,60,834/- the assessee has claimed a sum of ₹ 1,06,96,210/- being other provisions (column no. 39 of the profit and loss accounts of the return of income), debited in the profit and loss accounts. As such the assessee has determined total loss from business or profession at ₹ 96,35,376/- for the current year. However, the provisions are contingent in nature and hence not allowable as it is not allowable as it is not crystallized liability. Moreover, provisions have been claimed against income which is assessable as income from other sources. The assessee's claim is not allowable against income from business or profession and also against income from other sources. In the balance sheet the assessee has shown under the head Reserve and Surplus a capital reserve of ₹ 31,12,50,000/-. From verification of return for A.Y. 2008-09 it revealed that no such reserve has been transferred from earlier year. So it is crystal clear that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration which reads as under (relevant portion) Audit of accounts of certain person carrying on business or profession 44AB. Every person- (a)......... (b) carrying on profession shall, if his gross receipts in profession exceed [fifty] lakh rupees in any previous year; or get his accounts of such previous year audited by an accountant..... On perusal of the aforesaid provision of the Act, your kindself will note that in case of an assessee carrying on profession, is required to get his accounts audited in terms of section 44AB of the Act if his gross receipts in profession exceeds ten lakh rupees in any previous year. In the present case, your kindself will note that the Firm which is carrying on profession, had gross receipts in profession of INR 9,50,000/- as stated above which is less than the threshold of Rupees ten lakhs for application of section 44AB of the Act for the year under consideration. Your kindself will therefore appreciate that the provisions of section 44AB of the Act would not apply to the Firm for the year under consideration. d) During the year, the Firm has made deposits in its ordinary course of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udited accounts of the Firm (enclosed in Annexure I) that the subject amount of INR 1,06,96,210/- comprises of the following expenditures- INR Bank charges 110 Legal Expenses 52,87,700 External Consultants Professional Fees 54,07,850 Printing Stationary 500 Total 1,06,96,210 It is submitted that all the above expenses have been incurred by the Firm wholly and exclusively for the purpose of its business or profession and is accordingly allowable as deduction while computing the total income of the Firm. Your kindself will note that while the expenditure on bank charges and printing stationery are routine expenditure, the expenditure debited under the account-head 'legal expenses' have been incurred by the Firm for the purpose of representation inter alia before the ICAI, New Delhi in the matter of audit carried out by the Firm of erstwhile Global Trust Bank for the financial year 2002-03. The expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... your argument that firm has carried out its professional activity through its Partners is preposterous as not a single rupee has been incurred for earning of ₹ 9,50,000/-. (ii).Expenditure of ₹ 1,06,96,210/- In the aforesaid letter you have disclosed that the sum of ₹ 1,06,96,210/- was incurred relation to the proceedings before the disciplinary authorities for the matter pertaining to GTB for the A.Y.2003-04. From your statement it is crystal clear that the expenditure of ₹ 1,06,96,210/- is nothing to do with the current years profession and further it may have incurred for culpable negligence, professional misconduct and unethical practices adopted by the firm for the violation of the Laws Rules under which the profession of assessee firm is governed. Accordingly, prima facie the same was not allowable expenses against the current years income. Even otherwise also the same was not allowable under explanation to section 37 of the Income tax Act. (iii).Capital reserve of ₹ 31.13 Crs. You have disclosed that a foreign company and PWC networking firm Price waterhouse Coopers services BV, Netherlands has given you a sum of ₹ 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to when you have no business transaction with that company. The agreement was made effective on 18.07.2008 and the same date money was transferred to your account though the agreement was signed by you on 23.10.2008 and on 07.10.2008 by other party. What was the amount of interest, if any, earned on this sum of amount has never been disclosed. Further the entire amount has been given as loan to some of the partners of the firm though the scrutiny of their bank statement revealed no such amount transferred in their accounts. In view of the aforesaid there is no merit in your objections. Considering the reason recorded by the AO u/s. 147 of the I.T. Act, the objections raised by you are not acceptable. Hence the objection raised by you against the reopening of the assessment is hereby rejected. 6. Since the assessing officer rejected the objection raised by assessee for reopening assessment u/s 147 of the Act. Therefore, aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A) who has confirmed the action of the assessing officer. Aggrieved, the assessee is in appeal before us. 7. We heard both the parties and car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) An addition of ₹ 31,12,50,000/- reflected in the Balance sheet under the head capital reserve . The said sum represented a non-refundable grant received by the firm from PricewaterhouseCoopers Services BV, Netherlands for the purposes of maintaining and enhancing the resources and capabilities of the firm, as stated in Grant Agreement dated 18.07.2008. On appeal, the learned CIT(Appeals) upheld the validity of initiation of proceeding under section 147 of the Act and also upheld the addition of ₹ 31,12,50,000/- received by the Assessee as non-refundable grant under section 28(iv) of the Act. However, he deleted the disallowance (subject to directions to AO to verify TDS) of ₹ 1,06,95,600/-. Subsequently, the AO vide order dated 5 September 2018 has given relief of ₹ 1,06,95,600 after verifying that TDS was duly deducted by the Assessee. 8. First of all, let us examine the findings of the ld CIT(A) in respect of validity of reopening the assessment under section 147 of the Act, which are given below for ready reference: I have perused the detailed technical and legal submissions made by the assessee based on various judicial pronouncements in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asion for the AO to form an opinion after examining the documents enclosed with the return whether in the form of balance sheet, audited accounts, tax audit report etc. Now we shall examine issue-wise, to understand whether assessing officer has rightly exercised his jurisdiction u/s 147 of the Act: (i)Income of ₹ 10,60,834/-. The AO was of the view that the receipt of INR 10,60,834/- is assessable under the head 'income from other sources', which was factually incorrect as the assessee has submitted break up of ₹ 10,60,834/- in his return of income which is given below: INR Fees billed to client 9,50,000 Interest received 1,10,834 Total 10,60,834 During the year the Firm has rendered professional services to its various clients and have raised bills for fees on them for the services rendered. Client-wise detail of fees billed during the year was submitted by assessee before AO. Accordingly, the income of INR 9,50,000/- billed by the Firm to its clients towards rendering of professional servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebited under the account head External Consultants Professional fees have been incurred for drafting and amending legal agreements including non-compete agreements etc. AO was of the view that assessee made provisions of ₹ 1,06,96,210/-. We note that none of the expenditure aggregating to INR 1,06,96,210/- are in the nature of provision as alleged. These expenses have been disclosed in the return of income filed by the assessee u/s 139 of the Act therefore it is not a new tangible material to reopen the assessment u/s 147 of the Act. (iii).Capital reserve of ₹ 31,12,50,000/-: The assessee Firm is a member firm of the Price waterhouse Coopers global network of firms ( PwC network ). At the request of the Firm, Price waterhouse Coopers Services a company organized under the laws of the Netherlands, having its principal place of business at Fascinatio Boulevard 350, 3065 WB Rotherdam, The Netherlands ( PwC network ) provided a non-refundable grant to the Firm of INR 31,12,50,000/- during the financial year 2008-09 for the purpose of maintaining and enhancing the resources and capabilities of the Firm as referred in the Grant Agreement dated 18th July, 2008. The said g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO. Hence, after 1.4.1989, the AO has power to reopen, provided there is tangible material to come to the conclusion that there is escapement of income from assessment. Therefore, as noted above the assessee has disclosed every item/issue in the return of income filed by it u/s 139 of the Act, and AO failed to point out any new tangible material to reopen the assessment u/s 147 of the Act. Therefore, the reassessment proceedings in the assessee`s case is not valid. 10. We note that in the instant case, reassessment was initiated by the ld. A.O on account of the following reasons: (a) Professional receipt of 10,60,834/- is not assessable under the head profits and gains from business or profession, but under Income from other sources ; and tax audited report did not get by assessee. (b) Expenditure of ₹ 1,06,96,210/- (Pertaining to Legal expenses and External Consultants Fees) is contingent in nature and hence not allowable and as such a revenue of ₹ 10,69,210 is chargeable to tax as escaped income. (c) Capital Reserve of ₹ 31,12,50,000/- is undisclosed income and assessable as income from other sources. On perusal of the recorded reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the AO on 5th June, 1996 recorded reasons for issuing a notice to the assessee for reassessment on the ground that the assessee has wrongly claimed excessive deduction under s. 80-O of the IT Act, 1961 and that income has escaped assessment. Thereafter, on 11th June, 1996 the return of income was processed by the AO under s. 143(1)(a) of the Act and on the same date notice was issued to the assessee under s. 148 of the Act requiring it to file its return of income. 3. In CIT vs. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB), a Full Bench of this Court observed that an order of assessment can be passed either in terms of sub-s. (1) of s. 143 or sub-s. (3) of s, 143 of the Act. Insofar as the present case is concerned, it is an admitted position that no assessment order was passed under s. 143(3) of the Act and that the return of the assessee was processed under s. 143(1) of the Act only on 11th June, 1996. 4. In Trustees of H.E.H. the Nizam s Supplemental Family Trust vs. CIT (2000) 159 CTR (SC) 114 : (2000) 242 ITR 381 (SC), the Supreme Court observed : It is settled law that unless the return of income already fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now trying to do in an indirect (and incorrect) manner is what he could not have done directly. 9. The further contention raised on behalf of the Revenue is that even if no assessment order was framed, the AO could issue a notice for reassessment. We are of the view that if no assessment had been made, there was no occasion for the AO to conclude that income had already escaped assessment. 10. This being the position, we are of the opinion that no substantial question of law arises for our consideration and we do not find any error in the view that has been taken by the Tribunal in this regard. 11. Consequently, the appeal is dismissed. 11. Therefore, in the light of the aforesaid judicial precedents and other case laws, we note that to initiate reopening of the assessment, the Ld. AO must have 'reason to believe that income chargeable to tax has escaped assessment. Such reason to believe must be based on some material coming to the possession of the Ld. Assessing Officer which may trigger reason to suspect. It must be kept in mind that the reason to believe must have a rational connection with or relevant bearing on the formation of the belie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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