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TMI Blog2016 (8) TMI 1550X X X X Extracts X X X X X X X X Extracts X X X X ..... ea for all the ills. We would like to discuss the limitations of an audit objection in subsequent parargraphs. But, at present it is sufficient to say that re-opening should be done only in certain circumstances, as envisaged by the section. The entire approach of the AO and the FAA, in the background of the present case, is misconceived. The re-assessment order is based on allowability of provision of bad and doubtful debts. Perusal of the assessment order reveals that such details were called for by the AO. It is further found that the details of the provisions for bad and doubtful debts furnished by the assessee were scrutinized during the original assessment proceedings. In the notes accompanying the return of income the assessee had specifically mentioned the fact and basis of treating the amount in question in a particular manner - there does not appear to the tangible material/reason for the AO to reopen the assessment proceedings in the facts of the present case. He himself admits that scrutiny of the records revealed that there was escapement of income. So, the reasons, recorded by him, have to be analysed considering the post scrutiny events. AO was not convinced about th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. Assessee-Bank filed its return of income on 29.09.2008 declaring income of ₹ 320.87 crores. The original assessment u/s.143(3) was completed on 15.11.2010 determining income of the assessee at ₹ 337.70 crores. Later on a notice u/s.148. dt. 5.03.2013 was issued to the assessee. The AO completed the assessmnet u/s.143(3) r.w.s. 147 of the Act on 17.02.14, assessing the income of the assessee at ₹ 342.91 crores. ITA/1991/Mum/2015 (Assessee's Appeal): 2. First Ground of appeal is about re-opening. In response to notice u/s.148, the assessee had filed return of income on 07.10.2013. It made a request to the AO to provide it the copy of reason recorded. The reasons recorded by him for reopening the assessment read as under: "In this case it is found that assessing officer determined assessed income of ₹ 3,37,70, 08,315/-after disallowance of Provision on investment, under section 14A and disallowance u/s. 35D. Audit scrutiny of computation of income revealed that assessee has claimed deduction u/s. 36(l)(viia) for an amount of ₹ 200734588/- and the same as allowed by the department as given below. A.Y.2008-09 A.Y.2007-08 A.Y.2006-07 General l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the notice issued u/s. 148. The AO passed an order and rejected the objections raised by it vide order dated 30.12.13. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, it was argued that during the original assessment proceedings, the AO had asked the assessee to furnish details of outstanding balance of provision for bad and doubtful debts created u/s.36(1)(viia), that he had formed an opinion about the allowability of the item, that the assessee had also furnished submission with regard to claim made u/s. 35D of the Act, that the deduction claimed in computation of income was part of the notes forming part of return of income, that the reopening was based on change of opinion, thus reassessment on mere change of opinion was bad in law, that the re-opening was based on audit report. It relied upon the cases of Kelvinator India Ltd.(320ITR561), Foramer France (264/566), Rao Thakur Narayan Singh(56/234), Garden Silk Mills (222/68). 3.1. After considering the submission of the assessee and the order of the AO, the FAA held that the balance sheet showed other liabilities in Schedule-5, that as per deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Society (119 ITR 996); DRM Enterprises (230 taxman 61); ICICI Home Finance Co. Ltd. (210 Taxman 67); Excel Industries Ltd.(358 ITR 295)and Glaxo Smithkline Asia(195taxman35). She also referred to the page No.63, 137, 138, 112,113 of paper book . The Departmental Representative (DR) stated that it was not a case of change of opinion, that there were no bad debts, that assessee was not operating in the rural areas, that bad debts had to be written off as irrecoverable as per the provisions of the Act, that the bank had followed the RBI Guidelines, that there was no bar in the Act for not relying upon the audit objections, audit objection was one of the sources of reopening the escaped income. She referred to the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (291 ITR 500). 5. Before proceeding further, we would like to deliberate upon the validity of audit objections in re-opening of assessments. In our opinion, the part of the note of an audit party, which mentions the law that escaped the notice of the AO constitutes "information" and the part which emboides the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence between the AO and the higher authority showed that though the AO maintained that the audit objection raised by the audit party was not correct, however as the amount involved was very high as mentioned by the audit party and to safeguard the interests of the Revenue and the guidelines issued the reassessment proceedings have been initiated. Therefore, the formation of the opinion by the AO that the income chargeable to tax had escaped assessment was vitiated the reopening of the assessment could not be sustained and deserved to be quashed and set aside." Now, we would like to refer to Xerox Modicorp Ltd.(350 ITR 308) of the Hon'ble Delhi High Court. In that matter the following reasons were recorded by the AO for re-opening the case: "The assessment of M/s. Xerox India Ltd. for the AY.2004-05 was completed u/s. 143(3), vide order dated Decem ber 27, 2006, determining an income of ₹ 27,39,40,490. 2. The assessee-company had claimed and was allowed an expenditure of ₹ 3,79,50,791 on account of royalty paid to a foreign company in foreign exchange in lieu of rendering technical assistance. Since this expenditure has provided the assessee a benefit of endu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment resulted in a capital benefit ;such an opinion expressed by the audit cannot constitute tangible material on the basis of which the assessment can be reopened." In the case of Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC), the Supreme Court expressed the view that information as to correct legal position must come from a formal source or body which is competent to pronounce upon the issue and that the Revenue audit is not competent to pronounce on issues of law. There is no averment that the Revenue audit only pointed out to any factual aspect or material or primary fact that was omitted to be disclosed by the petitioner. 20. In the light of the foregoing, we are of the view that the notice issued u/s. 148 for the AY.2004-05 is also without jurisdiction. The same is quashed as also the consequent proceedings." Next is the case of Gujarat Fluoro Chemicals Ltd.(353 ITR 398), decided by the Hon'ble Gujarat High Court. In that matter, the assessee had filed its original return of income on declaring a total income of ₹ 23,75,74,840/-. The return was selected for scrutiny. The AO framed assessment u/s.143(3) of the Act computing the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head of operating and other expenses. In item 17 of the tax audit report u/s. 44AB, the assessee disclosed that an amount of ₹ 1.12 crores was a write down in the value of assets and that this excluded an amount of ₹ 29.23 lakhs which was a write down in the value of slow/non moving inventory valued at estimated realizable value being considered as not in the nature of capital expenditure. The AO reopened the assessment on the ground that the assessee had debited a provision amounting to ₹ 1.41 crores on account of diminution in the value of assets which in his view was not a proper charge on profits as the amount represented a provision made for a fall in the value of capital assets, which was considered to be capital in nature. The assessee in its objections drew the attention of the AO to the fact that in the statement of total income, it had already added back the amount of ₹ 1.12 crores and that the balance of ₹ 29.23 lakhs related to a write down in value on account of slow or non-moving inventory estimated on the basis of realizable value which could not be regarded as being in the nature of capital expenditure. The AO accepted that the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounded on tangible material and the AO had acted outside the fold of his jurisdiction. Now, we would refer to the judgment of Transworld International Inc. (273 ITR 242), of the Hon'ble Delhi High Court. Facts of the case were that the petitioner, a non-resident foreign company, was engaged in the business of producing television programmes primarily of sport activities. For the AY.1997-98 a return of income u/s. 139(1) of the Act was filed declaring an income of ₹ 95,59,750/- wherein a claim was made for depreciation @ 25%, amounting to ₹ 1,36,00,682/- on plant and machinery valued at ₹ 5,44,02,729/-. The return of income was processed u/s. 143(1)(a) of the Act. Various notices were issued and queries were raised during the course of assessment proceedings. According to the petitioner all the material facts necessary for assessment were disclosed fully and truly. All the queries were answered and necessary information called for was furnished for the purpose of determining the total income. The AO made an order u/s. 143(3) of the Act, and determined the total income of the assessee at ₹ 99,83,740/-.A tax-depreciation-schedule had been filed showing detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of basing a notice on an audit report. It had observed as under: "For the purpose of imposing a check over the arithmetical accuracy of the computation of income and the determination of tax, internal audit organisation was set up. From 1960 onwards the audit was entrusted to the Comptroller and Auditor General of India. The nature and scope of receipt audit are defined by section 16 of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. The audit by the Comptroller and Auditor General, as pointed out by the apex court, is principally intended for the purpose of satisfying him with regard to the sufficiency of the rules and procedures prescribed for the purpose of securing an effective check on the assessment, collection and proper allocation of revenue. Para. 3 of the circular issued by the Board dtd. 28.07.1960 warns that " the audit department should not in any way substitute itself for the revenue authorities in the performance of their statutory duties" . Para. 4 of the circular being relevant is reproduced hereunder (page 1003) : " Audit does not consider it any part of its duty to pass in review the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant portion from the apex court decision, this court has referred to the facts in detail. Thereafter, the court went on to deal with the Central Board of Direct Taxes instructions as under (page 231) : 'Notwithstanding this clear position of law emerging from the decision of the Supreme Court, the instructions of the Board still persisted that as soon as audit objections are raised, prompt remedial action in the nature of reassessment should be taken even if objection is not accepted by the Income-tax Officer. The instructions are being taken for remedial action, viz., remedial action should invariably be initiated as a precautionary measure in respect of audit objection, even if the objection is not accepted by the Income-tax Officer or without the assessing authority applying his mind to such information for reaching his own conclusion. Once the remedial action is initiated, it can be dropped with the approval of the Commissioner of Income-tax if the objection raised is one of facts and the facts stated to the audit are found to be incorrect. Thus, contrary to the decision of the Supreme Court, the instruction of the Board directs that merely on raising of audit object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner to review an order which is prejudicial to the Revenue." " Another aspect of the matter also cannot be lost sight of. A statute conferring an arbitrary power may be held to be ultra vires article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality, it is trite, should be favoured. In the event it is held that by reason of section 147 if the Income- tax Officer exercises his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional. We are therefore of the opinion that section 147 of the Act does not postulate conferment of power upon the AO to initiate reassessment proceeding upon his mere change of opinion. 24. It is required to be noted, as pointed out by learned counsel for the assessee, that there was no fresh information supplied to the AO by any one including the audit party. In a case like this, the duty of the AO is that he himself should examine the material placed on record and should arrive at a prima facie belief in this behalf. He must record a conclusion that there is escapement on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessing authority treated it as such information and proceeded to assess, there would be no objection to such a course. If, on the other hand, the audit party expressed a view on the materials and the assessing authority adopting that view decided to reopen the assessment, that might be objectionable. The assessing authority would then be acting not upon any information but upon the view expressed by the audit party. The Hon'ble Gujarat High Court has in the matter of Aryodaya Spinning and Weaving Company Limited(144 ITR 817) found that the assessee-company was engaged in the business of manufacturing textiles, that it was following the cost method for the purpose of valuing its opening and closing stocks of cloth and yarn for the purpose of income-tax assessment for the past several years, that the same method was also followed for the purpose of preparation of balance-sheet up to the AY.1965-66, that a departure was, however, made from the AY.1966- 67 onwards, that the assessee adopted two methods of valuation of stocks of yarn in process and cloth, one for purposes of the Companies Act, 1956, and another for purposes of incometax. So far as the yarn in process was conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to the ITO to reopen the completed assessment upon a reappraisal of the material considered by him during the original assessment. An error discovered on a reappraisal of the same material without anything more does not give him the power to reopen the assessment under s. 147(b).(emphasis by us). ……. on the facts and circumstances of the case, the appendage or label which the petitioner gave to the method of valuation of stock of yarn was not by itself a primary fact necessary for assessment. Even assuming it was a primary fact, the petitioner had simultaneously placed on record in the form of a statement the details or particulars in relation to the valuation of stock. In other words, the actual method adopted by the petitioner for valuing the stock was laid bare in all its essential particulars in the course of the original assessment proceedings. It was for the ITO to draw the correct inference from all those primary facts taken together and to decide, inter alia, whether or not the stock could be said to have been valued at cost as claimed by the petitioner. It was no part of the duty of the petitioner to advise the ITO with regard to the true and correct in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the meaning of s. 147(b). The notice of reassessment was invalid and liable to be quashed." 5.2. We would like to refer to some of the matters dealing with the concept of change of opinion, as the courts are unanimous that re-assessment proceedings, initiated because of change of opinion, have to be quashed. Facts of the first case i.e. Central Warehousing Corporation Ltd. (382 ITR 172)were that the assessment of the assessee for the AY.2005-06 was completed u/s.143(3) of the Act. The AO subsequently reopened the assessment on the ground that he had inadvertently failed to notice that income of the assessee from the disposal of stocks in the bonded warehouse had escaped assessment. The Tribunal held that the reopening of the assessment was invalid. Dismissing the appeal filed by the department the Hon'ble Delhi High Court held as under: ……the original assessment was framed under section 143(3) of the Act and while framing original assessment, a specific query was raised by the Assessing Officer and was clarified by the assessee in writing. It was not a case where relevant material was not disclosed by the assessee in the first round of assessment. Thus the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain products. It filed its returns for the AY.s.2007-08 and 2008-09. The assessments were made and the AO in the assessment orders had referred to the mutual agreement to avoid double taxation under article 27 of DTAA between India and the U. S. A, for the AY.s.2001-02 to 2004-05 and the fact that subsequently for the AY.2005-06, assessment was concluded following the mutual agreement procedure. The AO in the assessment order had specifically recorded that since the facts of the year under consideration remained the same, following the agreement reached by the respective competent authorities in the earlier years, the tax was computed at 10% according to resolutions passed in the mutual agreement procedure. Notices of reassessment were issued in respect of both the assessment years. 5.4. On writ petitions against the notices, the Hon'ble Delhi Court held that no fresh information or material had been referred to in the reasons recorded for seeking to reopen the assessment, that the material that was referred to was the very same material that was already before the AO at the time of framing of the assessments u/s.143(3) of the Act and even the reasons recorded that 'from the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits derived from technical services from the eligible profits. The Tribunal annulled the reassessment proceedings. On appeal to the High Court, the matter was decided as follow: "….. it could be seen from the original assessment records that the claim of the assessee under section 10A was thoroughly scrutinised, the Assessing Officer had examined the claim of expenditure incurred in foreign currency for providing technical services allocating the sum of ₹ 38,51,45,781 between the five software technology park units in the ratio of the export sales. In fact, the Assessing Officer had raised certain queries during the assessment proceedings and a detailed reply had been given by the assessee. Jurisdiction under section 147 of the Income-tax Act, 1961, can be invoked by the Assessing Officer where he has reason to believe that income chargeable to tax has escaped assessment. However, such "reason to believe" cannot be based on a mere change of opinion. The Assessing Officer does not have jurisdiction to review his own order. ……The Tribunal was fully justified in arriving at the conclusion that the reopening of assessment was by change of opinion. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect assessment made earlier….. The decision to reopen assessment was not based on proper reasons but obviously was a result of change of opinion. This was impermissible. The notice of reassessment was not valid and was liable to be quashed." 5.5. In our view, the entire approach of the AO and the FAA, in the background of the present case, is misconceived. The re-assessment order is based on allowability of provision of bad and doubtful debts. Perusal of the assessment order reveals that such details were called for by the AO. It is further found that the details of the provisions for bad and doubtful debts furnished by the assessee were scrutinized during the original assessment proceedings. In the notes accompanying the return of income the assessee had specifically mentioned the fact and basis of treating the amount in question in a particular manner. In these circumstances, there does not appear to the tangible material/reason for the AO to reopen the assessment proceedings in the facts of the present case. He himself admits that 'scrutiny of the records revealed' that there was escapement of income. So, the reasons, recorded by him, have to be analysed considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or standard asset/advances to meet unascertained liability that may become expenditure on the happening of an event in future( last three-years not bad debts) which is inadmissible deduction and contradictory to the CBDT's instruction." However, the the AO was of the opinion that stand taken by him about the provisions of bad and doubtful debts was as per law. He stuck to the stand that was taken by him during the original assessment. The AO, vide his letter dt.18.1.2013, addressed to the Director of Audit (ITRA)intimated that objections raised by audit authorities were unacceptable. His letter reads as under :- Sub:- Revenue audit objection in the case of Yes Bank Ltd. for A.Y. 2008-09 (AQ No. 3& 4 51st Cycle) Please refer to the above. The audit has pointed out that (i) The AO has not added back preliminary expenses of ₹ 5677691/-and (ii) A.O. has allowed deduction of provision for standard asset of ₹ 179594700/-. The above objections are not acceptable on the following grounds:- (i) Deduction u/ s.35D Before commencement of Business in the financial year ended 31.3.2004, the assessee bank has incurred the following expenses: Particulars Amount Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e balance sheet and serves as a buffer when the assets are classified as NPA. For the financial year ended 31.3.2007, the provision was based on the RBI circular dated January 31, 2007, RBI/ 2006-2007/240 DBOD. No. BP. BC. 53 /21.04.048 / 2006-2007 (copy attached). . The workings as on 31.03.2007 and the P and L expense for the year is as below: Breakup of advances into Gross value of advances Rate of provisioning Amount Direct Agriculture 9,934,332,360 0.25% 24,835,831 Loans to Staff 4,051,308 1.00% 40,513 Personal Loans 489,801,475 Secured Commercial real estate 4,415,510,653 Capital Mkt Exposure 2,079,747,510 6,985,059,638 2.00% 139,701,193 Exposure to Small and Micro enterprises 322,271,534 0.25% 805,679 Non Deposit taking NBFCs 1,931,503,527 2.00% 38,630,071 All other Loans and Advances including adversely labeled Accounts 75,040,926,121 0.40% 321,803,168 Total Provision require as on March 31, 2008 525,816,454 Provision as on March 31,2007 346,221,754 P&L expense for the financial year 2007-08 179,594,700 In the tax return for Assessment year 2008-09, the entire amount of ₹ 179,594,700 added in the return of Income and was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt/ in the reply sent to the audit party and while issuing the notice u/s.148 of the Act. There is not an iota of doubt that it is a clear case of change of opinion. A question may arise, that if he was not convinced that the validity of the objection raised by the audit party then why did he issue a re-assessment notice. The simple and obvious answer is binding nature of provisions of section 119 of the Act which stipulates that the Circulars/ Instructions issued by the CDBT have to be followed by the officers of field formation and at that time Circular no.9/2006 was very much there. The said circular had tied down the hands of the AO.s. There was no option with the them at that time. Once they received an objections from the audit wing, they had to take a remedial actions compulsorily. In short, the AO had invoked the provisions of section 147 of the Act not because he was convinced about the escapement of income, but because he had no alternative. 5.6. In the earlier part of our order, we have deliberated upon the cases dealing with audit objections. From the said discussion it is clear that the quasi judicial powers of the AO cannot be curtailed by circulars or instruction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad and doubtful debts, called for by the AO, during the assessment proceedings, that the AO had passed an order u/s.143(3)of the Act after considering the said details, that he supported the said order while replying to the audit objections, that the AO had no option but to take a remedial action in pursuance of the Board circular No. 9/2006 and respectfully following the judgments of Indian Experess(supra), Turner Broadcasting Systems Asia Pacific Inc.(supra), Anil Starch Products Ltd.(supra), Aryodaya Spinning and Weaving Company Limited (supra) and Aroni Commerci-als Ltd. supra), we hold that the order of the FAA cannot be endorsed. The facts and circumstances reveal and we are satisfied that in the present case, the order of reopening of the assessment was not be justified. The decision to reopen the assessment was not based on proper reasons, but was obviously a result of change of opinion- it was solely based on the audit objection. This is impermissible and therefore not valid. We would like to refer to the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra). In that case it was found that the return was processed u/s. 143(1). The AO issued a notice u/s.148 on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgment is not done by any Assessing Officer, but mostly by ministerial staff. It cannot therefore be said that an "assessment" is done by them. The intimation under section 143(1)(a) was deemed to be a notice of demand under section 156 for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. Nothing more can be inferred from the deeming provisions. Therefore, there being no assessment under section 143(1) (a), the question of change of opinion does not arise. " In the case before us, the AO had completed the assessment u/s.143(3)of the Act and deliberated upon the issue. Not only this he did not accept the audit objection also. An intimation is totally different from a scrutiny assessment. Therefore, the case relied upon by the DR is of no help to the Revenue. 7. While deciding the jurisdictional issue with regard to re-opening, we have held that the order of the AO was invalid, therefore, we are not deciding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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