TaxTMI 
TaxTMI 
2016 (8) TMI 1550
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....n 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 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 (se....
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....nished 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 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 creat....
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....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 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 ....
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....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 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 the....
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....e 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 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 wa....
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....n 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 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....
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.... 1,36,00,682/- on plant and machinery valued at Rs. 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 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 trul....
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....ointed 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 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 Benc....
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....ing 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 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....
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....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 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 specificall....
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....ing 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 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 adopte....
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....ry 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 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 ....
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....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 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, ....
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....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 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 petit....
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.... Rs. 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 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 w....
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....s 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 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....
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....O, 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 Rs. 5677691/-and (ii) A.O. has allowed deduction of provision for standard asset of Rs. 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 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 in....
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....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 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 Ban....
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....g 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 of the CBDT. The Board(CBDT) vide its Cir. No. 8/2016(....
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....ring 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 basis of an audit objection and the matter travelle....