TaxTMI 
TaxTMI 
2016 (8) TMI 1550
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....o 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 Rs. 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 Rs. 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 loan loss provision (i.e., Provision for standard asset/advances as per RBI Guidelines) .... A 179594700 254229012 72962742 Provision for NPA .... B 21139888 Nil Nil Total Provisions (C)=A+B 200734588 254229012 72962742 Total income beforededuction ... D 3409899537 16822358394 831125223 7.5% 255742465 226176880 62334392 Deduction u/s.36(1)(viia) lower C and D 200734588 126176880 62334392 It would be seen from the above that assessee is regularly creating provision for standard assets and advances (see note forming part of the accounts 18.4.3) under the head General loan loss provision excluding Provision for....
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....rming 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 details of said Schedule-5 provisions, subordinated debt and provision for standard advances were shown under the head 'Others' at pg-10, that it had made provisions as per guidelines issued by RBI, that provisions made by assessee fell in the category of provisions for investment/standard advances provision for non performing assets, that those provisions had been made as per RBI guidelines by crediting the amount during the year, that as per provisions of section 36 (1) (viia) the provision for bad and doubtful debts was required to be created from AY.2000- 01 to 2004-05 only, that the provisions of section 36(1)(viia)were applicable for only rural branches of the bank, that the as....
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....aped 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 account by the AO.A completed scrutiny assessment should not be disturbed in a light manner. If an audit objection points out some mistake in the original order provisions of section 154 have to be invoked and not of section 147. Both the sections find place in the Act for specific purposes. Similarly, if the order passed by an AO is found to be erroneous and prejudicial to the interest of Revenue, a notice u/s.148 should not be issued. Section 147 is not panacea 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 sec....
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....rded 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 Rs. 27,39,40,490. 2. The assessee-company had claimed and was allowed an expenditure of Rs. 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 enduring nature, this expenditure ought to have been treated as capital expenditure." It was contended before the Court that once an assessment was completed u/s.143(3) of the Act, the AO was presumed to have applied his mind to all the issues and he could not thereafter reopen the assessment on the ground that he did not form any opinion with respect to any particular issue;he must have tangible material before him on the basis of which he can entertain a reason to believe that income chargeable to tax has escaped assessment that there was no reference to any tangible material in the reasons recorded and that all that was stated therein was that the expenditure by way of royalty conferred an enduring benefit to the a....
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....ed 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 Rs. 23,75,74,840/-. The return was selected for scrutiny. The AO framed assessment u/s.143(3) of the Act computing the total income of the assessee at Rs. 26,01,66,900/-. Later on, the AO issued a notice on to reopen the assessment of the petitioner. At the request of the petitioner, reasons for reopening were supplied. The assessee , under communication, dated 24/12/2004, raised detailed objections to such reopening of assessment. Primarily the contention of the assessee was that all the three grounds on which the AO desired to reopen the assessment were examined in the original scrutiny assessment and that, therefore, reopening on such basis was not permissible. Such objections were rejected by the AO. At that stage, the assessee filed the petition before the Hon'ble Court, challenging the notice for reopening of assessment itself. Allowing the petition, the ....
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....he 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 Rs. 1.12 crores and that the balance of Rs. 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 amount of Rs. 1.12 crores out of Rs. 1.41 crores had been disallowed by the assessee in the return of income. However, he treated the balance of Rs. 29.23 lakhs to be of a capital nature without dealing with the objection of the assessee that a write down in the value of slow moving or non-moving inventory could not be treated as of a capital nature. On a writ petition the Hon'ble Court allowed the petition and held that the reopening of the assessment was not valid. The Court observed as under: "It is now a settled position of law that though, after April 1, 1989, the power to reopen an assessment is much wider than previously, the words "reason to believe" do not confer an arbitrary power upon the AO to reopen an assessment merely on the basis of a change of op....
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.... 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 Rs. 99,83,740/-.A tax-depreciation-schedule had been filed showing details of depreciation claimed. The plant and machinery included one OB van. Subsequently an audit objection was raised to the grant of full depreciation. A notice of reassessment was issued there upon. On a writ petition, against the notice and reassessment proceedings , the Hon'ble Court held as under: "The validity of initiation of reassessment proceedings has to be judged with regard to the material available with the authority at the point of time of issuing the notice u/s. 148 of the Income-tax Act, 1961. When the assessee has disclosed fully and truly all material facts necessary for the assessment and on the basis of which the assessment is made, then exercise of powers u/s. 148 of the Act contemplates that : (a) there must be material for the belief regarding escape of income from taxation ; (b) circums....
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.... 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 exercised or the decision taken in individual cases by officers entrusted with those duties, but it must be recognized that an examination of such cases may be an important factor in judging the effectiveness of assessment procedure . . . It is, however, to forming a general judgment rather than to, the detection of individual errors of assessment, etc., that the audit enquiries should be directed. The detection of individual errors is an incident rather than the object of audit." The Hon'ble Court also observed as under: " Where a Bench of two learned judges of this court observed that a case where income had escaped assessment due to the ' oversight, inadvertence or mistake' of the Income-tax Officer must fall within section 34(1)(b) of the Indian Income-tax Act, 1922. It appears to us, with respect, that the....
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....on. 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 objection remedial action by initiating proceedings of reassessment be taken, notwithstanding that the authority vested with power to exercise jurisdiction for issuing notice is not satisfied about existence of such circumstances which may warrant exercise of such power. To say the least, such ultra vires instructions cannot be pressed into service to save the initiation of proceedings u/s. 147, in the absence of holding of any belief by the Assessing Officer, by arrogating the power to itself by the Board by issuing such directions contrary to the provisions of law at the pain of subjecting the officer to pain of exposing him to charge of insubordination' ." A Full Bench of the Hon'ble Delhi High Court, in the case of Kelvinator of India Ltd. (256 ITR1), had also an occasion to examine a similar aspect. The court examined the effect of amendm....
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....e, 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 excessive depreciation allowance and is required to give reasons in this behalf. He has to justify the exercise of reassessment. In the instant case, the AO while recording the reasons has not done any exercise. Where an assessment has been made and there is purported excessive depreciation, its allowance would require examination of facts and that must be reflected in a well reasoned document before issuance of notice for reassessment. In the instant case, that exercise has not been done. Section 148 of the Act specifically requires the AO to record reasons. The validity of initiation of reassessment proceedings has to be judged with regard to the material available with the authority at the point of time of issuing the notice u/s. 148 of the Act. When the assessee has disclosed fully and truly all material facts necessary for the assessment and on the basis of ....
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....ation 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 concerned, the assessee followed a uniform method of valuing the stock at 12 paise per Kg. for purposes of income-tax. Cost of yarn in process for purposes of its balance-sheet was worked out by adding 25% weaving charges to the cost of ready yarn. For the AY.s.1970-71 and 1974-75, the petitioner followed the same method of valuation of its stock which it had followed from the AY.1966-67. In other words, it valued its stock of yarn in process at 12 paise per Kg. for the purpose of income-tax, while it adopted a different method of valuation for the purpose of balance-sheet and profit and loss account, as mentioned above. Statements containing details of methods of valuation adopted by it were filed along with its returns of income. Balance-sheets in which a method different from the one adopted for the purpose of income-tax was followed were also filed in the course o....
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....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 inference which should be drawn from those primary facts as regards the method of valuation. There was, therefore, no justification for reopening the assessment in either of the assessment years under consideration under s. 147(a). The factual information supplied by the audit objection was already considered by the ITO when he framed the assessment. The ITO had stated that the acceptance of the method of valuation of stock was erroneous. The error, if any, was discovered on a reappraisal of the same material on record. This was, therefore, a case of mere change of opinion. The ITO, therefore, had no jurisdiction to reopen the assessment for 1974-75 under s. 147(b)." In the matter of Anil Starch Products Ltd.(134 ITR 355) the Hon'ble Gujarat High Court had found that a notice of reassessment was issued on information received from an audit objection pertaining to deduction....
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....r 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 reopening of the assessment by the Assessing Officer for the assessment year 2005-06 was based on a change of opinion, which was impermissible in law. In the matter of Tirupati Foam Ltd.(380 ITR 493)the Hon'ble Gujarat High Court held that where the issue of accounting treatment in respect of unutilised Cenvat credit for the purpose of valuing the closing stock was already examined by the AO during the scrutiny assessment, reassessment proceedings, on the same issue without any tangible material, was mere a change of opinion and, hence, not sustainable. In the case of Turner Broadcasting Systems Asia Pacific Inc.(380 ITR 412)following propositions of law laid down by the Full bench of the Hon'ble Delhi High Court in the case of Usha International Ltd. (348 ITR 485), were referred to: (i) the expression "change of opinion" postulates formation of opinion and then a change thereof. In the context of....
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....een 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 perusal of the assessment record, it is observed that', that it showed that the AO had sought to re-appreciate the material that was already there at the time when the assessment was framed u/s.143(3), that it was clearly a case of change of opinion,(emphasis by us)which was clearly not permissible, that the notices were not valid. We would also like to reproduce paragraphs 16 and 17 of the order and same read as under: 16. Perusal of the assessment orders in both the petitions clearly show that an opinion was formed by the Assessing Officer that taxation of advertisement and distribution revenue was to be governed by the MAP resolution and the competent authorities of the USA and India had agreed to an attribution of 10 per cent. of the total revenue generated from the said distribution and advertisement sales agreement. The same was agreed to be treated as business income. 17. A detailed question....
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....n 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 reassessment was not valid." In the matter of Plus Paper Food Pac Ltd.(374 ITR 485)issue of depreciation was dealt by the AO in the original assessment passed u/s.143(3)of the Act. Later on, he issued notice u/s.148 with regard to allowability depreciation. Matter travelled up to the Hon'ble Bombay High Court and was decided as under: "Reassessment proceedings can be initiated only if the Assessing Officer has reason to believe that income has escaped assessment. The words "reason to believe" must receive an interpretation which is in consonance with the scheme of the law. There cannot be arbitrary powers to the Assessing Officer to reopen assessment on the basis of a mere change of opinion. The Assessing Officer has no power to review. He has only a power to reassess. In the garb of reopening the assessment, a review cannot take place.........the original assessment order in the present case had obviously taken into ....
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....en 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. An audit objection was raised by the Audit authorities-vide his letter, dtd.25/8/2011, the Sr. Audit Officer intimated the AO as under :- Subject:- incorrect computation of business income As per Provision of Section 37 of IT Act envisages that an amount debited in the Profit & Loss A/c in respect of accrued or ascertained liability only is an admissible deduction, while any provision in respect of any unascertained liability or liability which has not accrued, do not qualify for deduction. In this regard CBDT also instructed all assessing officer vide instruction No17/2008 to verify the provisions on different accounts claimed by the bank probably under the RBI guidelines( i.e Provision for wage arrears for which negotiations are yet to be finalized, provision for standard assets/advances etc .... ). A contingent liability cannot constitute deductible expenditure for the purpose of Income Tax Act. Thus, putting aside of money whi....
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....n 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 Registration fee and other charges under the Companies Act on incorporation of the Company. 27,117,200 Legal Fees for drafting of memorandum and Articles of association on incorporation of the company. 1,271,254 Total 28,388,454 The above expenses are covered under Sec 35D(2) and the claim is made under Sec 35D (1). (i) of the Income Tax Act. As the claim is under Sec 35D (1) (i), the restriction for industrial undertakings does not apply and the section is available to all assesses. The reading of the section is as below: Quote* 35D. (1) Where an assessee, being an Indian-company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),- (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 2-[***] undertaking or in connection with his setting up a new 2.[***] unit, Unquote From the above reading,....
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....08 525,816,454 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 Rs. 179,594,700 added in the return of Income and was considered for the purpose of the Sec 36(1)(viia) as follows: A.Y 2008-09 General Loan Loss Provision (as per the Guidelines issued by the Reserve Bank of India ) ...(A) 179,594,700 Provision for Non-Performing assests(as per the Guidelines issued by the Reserve Bank of India)..(B) 21,139,888 Total Provision (C)= (A)+(B) 200,734,588 Total Income (computed before making any deduction under this clause and Chapter VIA)...(D) sec 36(1)(viia)-Refer computation of Income 3,409,899,537 7.5% 255,742,465 Deduction under section 3691)(viia) Lower of (C) and (D) 200,734,588 In assessment year 2009-201Q and 2010-2011, when certain bad loans which were written off, the benefit for the actual write-off of debts was taken only after reducing the balance under Sec 36 (1) (viia) (which included the above mentioned balance) and the workings are given below: Financial Year Claim in the ret....
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....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 of the CBDT. The Board(CBDT) vide its Cir. No. 8/2016(dated-17.3.2016) has modified the Instruction No.9 of 2006. By issuing the said Circular the CBDT has followed the observations of the Hon'ble Gujarat High Court in the case of Seth Brothers(supra)and has restored back the earlier position i.e., that if the departmental authorities are not satisfied about the correctness of the objections, they need not to take any remedial action. In short, the instruction has done away with compulsory initiation of remedial action in case of an audit objection and has restored the legitimate powers of the AO.s., after the Hon'ble Courts had clearly opined that earlier circular was not in accordance with the provisions and spirit of the Act. Audit authorities, an outside agency, definitely has an important role to point out irregularities of assessment orders. But, a Laxamn-Rekha has to be there for ....
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....f 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 basis of an audit objection and the matter travelled upto the Hon'ble Supreme Court . Deciding the case, the Hon'ble Court held as under :- "Under the scheme of section 143(1) of the Income-tax Act, 1961, as substituted with effect from April 1, 1989, and prior to its substitution with effect from June 1, 1999, what were permissible to be adjusted under the first proviso to section 143(1)(a) were : (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction, allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return, and similarly (iii) those claims which were, on the basis of the information available in the return, prima facie inadmissible, and were to be rectified/allowed/dis-allowed. What was permissible was correction of errors a....