2021 (2) TMI 1161 - HC - Income Tax

Court upholds validity of assessments reopening under Section 148 of Income Tax Act for petitioner

M/s. Durr India Private Limited, Versus Assistant Commissioner of Income Tax (OSD) Corporate Range 1, Principal Commissioner of Income Tax 1, Chennai

The court upheld the validity of the reopening of assessments under Section 148 of the Income Tax Act, 1961 for the petitioner for the Assessment Years ... Reopening of assessment u/s 147 - it is the contention of the Income Tax Department that the method followed by the petitioner has not disallowed the correct income - HELD THAT:- The petitioner is engaged in supply and installation of paint booth for automobile companies. The petitioner has adopted mercantile method of accounting which is one of the recognized method for the purpose of recognition of income under the Income Tax Act, 1961. The law on the subject is also clear. Every assessee is entitled to arrange its affair and follow the method of accounting which the department has earlier accepted. According to the petitioner, the method adopted by the petitioner has been accepted for the Assessment Years 2010-11, 2012-13, 2014-15 and thereafter. As per outcome of a construction contract can be estimated reliably, contract revenue and contract cost associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. Petitioner may have entered into several contracts with different clients with varied terms and conditions. These documents are required to be produced before the Assessing Officer at the time of assessments. The purpose of accounting under the Income Tax Act, 1961 is to ascertain the taxable income and to determine the tax payable by an assessee. Therefore, these documents and other ancillary documents are required to be produced before an AO or ITO during the assessment. A Proper Certification whether by an In-House Department of the Assessee or by an Independent Chartered Engineer certifying the percentage of work completed under the contract was required to be produced by the assessee before the Income Tax Officer for the purpose of assessment. What was the term of the contract under which the revenue was generated or the bill raised on a client or a customer cannot be certified in the Audited Profit and Loss Account and the Balance Sheet. At best, they can corroborate what is there in the contract. Therefore, unless those supporting documents are produced, it cannot be said that there was full disclosure. The enclosures filed before the Assessing Officer at the time of Section 143(3) Assessment do not indicate the same. Therefore, it cannot be said that there was true and full disclosure of all materials that were required for assessment before the Assessing Officer by the petitioner. At the same time, it is to be noticed that the reasons given in the communications dated 05.11.2018 for reopening the respective assessment have merely questioned the method of accounting adopted by the petitioner and show it was issued in a mechanical manner. As per Explanation 1 to Section 147 of the Income Tax Act, 1961, production before the Assessing Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of Section 147 of the Act. In fact, Explanation incorporates the reasons given in the decision of the Hon'ble Supreme Court in Calcutta Discount Co. Ltd. Vs. Income Tax Officer, [1960 (11) TMI 8 - SUPREME COURT] Conclusions arrived in the impugned communications dated 26.11.2018 overruling the objections of the petitioner for the reopening of the assessments by the impugned notices are not conclusive. They are only prima facie views of the Assessing Officer. It is for the petitioner to establish that it has correctly followed the accounting method by producing the supporting documents to substantiate the percentage of work that was completed for the purpose of proper determination of taxable turnover for payment of income tax. Mere disclosure in the Profit and Loss Account and Balance Sheet is not sufficient. No justifiable reasons to interfere at this stage of the re-assessment proceedings. Therefore, the first respondent is therefore directed to complete the re-assessment after examining the documents to be produced by the petitioner and pass reassessment orders on merits. The petitioner is therefore directed to file documents to substantiate its cases before the first respondent within a period of thirty days from date of receipt of a copy of this order. The first respondent shall pass orders within a period of 60 days thereafter. Issues Involved:1. Validity of the reopening of assessments under Section 148 of the Income Tax Act, 1961.2. Method of accounting and recognition of income.3. Requirement for full and true disclosure of material facts.4. Justification for reassessment based on the method of accounting.Issue-wise Detailed Analysis:1. Validity of the reopening of assessments under Section 148 of the Income Tax Act, 1961:The petitioner challenged the notices issued under Section 148 for the Assessment Years 2011-12 and 2013-14, arguing that the reopening was arbitrary and lacked justification. The court noted that reopening assessments based on a change of opinion or without a failure to disclose material facts is frowned upon by the Supreme Court. However, the court found that the reopening was justified as the petitioner had not provided sufficient documentation to substantiate the percentage of work completed during the original assessments.2. Method of accounting and recognition of income:The petitioner followed the mercantile method of accounting, specifically the percentage of completion method as per Accounting Standard AS-7. The court acknowledged that this method is recognized under the Income Tax Act and has been accepted by the Income Tax Department for other assessment years. The court also noted that the Supreme Court has approved this method in previous judgments. However, the court emphasized that mere qualification in the Annual Report is insufficient; detailed documentation supporting the percentage of work completed must be provided during assessments.3. Requirement for full and true disclosure of material facts:The court highlighted that full and true disclosure of all material facts is necessary for assessments. The petitioner failed to produce documents substantiating the percentage of work completed, which led to the reopening of assessments. The court referenced Explanation 1 to Section 147, which states that merely producing account books does not amount to full disclosure if material evidence could have been discovered with due diligence by the Assessing Officer.4. Justification for reassessment based on the method of accounting:The court found that the reasons given in the communications for reopening the assessments questioned the method of accounting adopted by the petitioner. The court concluded that the reassessment was justified as the petitioner had not demonstrated that the method of accounting accurately reflected the correct income. The court directed the petitioner to provide the necessary documents to substantiate its claims and for the Assessing Officer to complete the reassessment based on these documents.Conclusion:The court disposed of the writ petitions, directing the petitioner to submit documents substantiating the percentage of work completed within thirty days. The Assessing Officer was instructed to complete the reassessment within sixty days thereafter, focusing solely on the issue of the percentage of work completed and the recognition of income. The court did not find any justifiable reasons to interfere with the reassessment proceedings at this stage.