2022 (2) TMI 1093 - HC - Income Tax

Court emphasizes RBI compliance for recognizing income from NPAs, quashes AO's order for procedural lapses

Tata Capital Financial Services Limited Versus Assistant Commissioner of Income Tax Circle 1 (3) (1) and Ors.

The court ruled in favor of the petitioner, a Non-Deposit Accepting NBFC, emphasizing compliance with RBI norms for recognizing income from NPAs and the ... Reopening of assessment u/s 147 - Rejection of objection put by Assessee - HELD THAT:- In the order passed rejecting the objections the Assessing Officer has not dealt with all thes points. Assessing Officer was duty bound to deal with all the submissions made by petitioner in its objections and not just brush aside uncomfortable objections under the carpet. We have to note that petitioner had, with the objections, also requested the Assessing Officer to provide photocopies of documents evidencing request sent by the Assessing Officer to the Principal Chief Commissioner of Income Tax/Chief Commissioner/Principal Commissioner/ Commissioner in terms of Section 151(1) of the Act for obtaining an approval for re-opening of the assessment for the year under consideration and documents evidencing the approval received from the Principal Chief Commissioner of Income Tax/Chief Commissioner/Principal Commissioner/ Commissioner. Assessing Officer instead of providing these documents simply dismissed petitioner’s request by saying it is purely an administrative matter and all correspondence have been made through system. Assessing Officer was duty bound to provide all the documents called for by petitioner and his reluctance to provide these documents only would make the court draw adverse inference against respondent. The order impugned in this petition is quashed and set aside. The matter is remanded for denovo consideration. The concerned officer shall keep in mind that the exercise of considering the assessee’s objections to the re-opening of assessment is not a mechanical ritual but a quasi judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. Issues:1. Compliance with RBI directions on prudential norms for NBFCs.2. Disallowance under Section 14A of the Income Tax Act.3. Reopening of assessment for A.Y. 2013-14 under Section 147 of the Act.4. Failure of the Assessing Officer to address objections adequately.5. Lack of documentation provided by the Assessing Officer.6. Judicial guidelines for reopening assessments.Issue 1: Compliance with RBI directions on prudential norms for NBFCs:The petitioner, a Systematically Important Non-Deposit Accepting NBFC, followed RBI directions to recognize income from Non-Performing Assets (NPA) only upon actual realization, not on accrual basis. This method was disclosed in financial reports and tax audits. The petitioner faced scrutiny, leading to a disallowance under Section 14A of the Act, which is a separate matter.Issue 2: Disallowance under Section 14A of the Income Tax Act:During assessment proceedings, the petitioner's income was scrutinized, resulting in a disallowance under Section 14A of the Act. However, this disallowance is not relevant to the current petition.Issue 3: Reopening of assessment for A.Y. 2013-14 under Section 147 of the Act:The petitioner received a notice for reopening the assessment for A.Y. 2013-14 under Section 147 of the Act, citing reasons that income may have escaped assessment. The petitioner objected, citing the treatment of interest and charges on NPAs based on actual realization, as supported by various legal judgments, including the Delhi High Court and the Supreme Court.Issue 4: Failure of the Assessing Officer to address objections adequately:The Assessing Officer's order rejecting objections did not address all points raised by the petitioner. The court emphasized that all submissions should be considered, and proper reasons provided for conclusions. The Assessing Officer's failure to provide requested documentation raised concerns, leading to the quashing of the order.Issue 5: Lack of documentation provided by the Assessing Officer:The Assessing Officer failed to provide requested documents related to the approval process for reopening the assessment. This lack of transparency and reluctance to provide essential documents was viewed unfavorably by the court, leading to the order being set aside.Issue 6: Judicial guidelines for reopening assessments:The court highlighted the need for Revenue authorities to adhere to specific guidelines when reopening assessments under Sections 147 and 148 of the Act. These guidelines include providing necessary documents, proper reasons for reopening, and granting a personal hearing to the assessee. The court directed the Central Board of Direct Taxes to issue clear instructions based on these guidelines to prevent repeated errors and reduce the burden on the courts.This detailed analysis of the judgment provides insights into the various issues addressed by the court and the legal implications surrounding compliance with RBI directions, disallowances under the Income Tax Act, reopening of assessments, and the importance of procedural transparency and adherence to judicial guidelines.