IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on : 10th July, 2013
Judgment pronounced on: 23rd August, 2013
+ W.P.(C) No.2250/2012
M/S. SMCC CONSTRUCTION INDIA LTD.
..... Appellant
Through: Mr. Nageshwar Rao with Ms.
Sayaree B. Malik, Advocates
versus
ASSISTANT COMMISSIONER OF INCOME-TAX
... Respondent
Through: Mr. Sanjeev Sabharwal,
Advocate
CORAM:
HON'BLE MR. JUSTICE SANJ IV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJEEV SACHDEVA, J.
1. The petitioner by way of the present writ petition
has challenged order dated 15.03.2012 passed by
the Assistant Commissioner of Income Tax
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W.P.(C) 2250/2012 Page 1 of 12
disposing of the objections filed by the petitioner
against issuance of notice under Section 148 of the
Income Tax Act, 1961 (hereinafter referred to as
(the Act) and the very issuance of the notice dated
15.03.2012.
2. The assessment year in issue is 2002-03.
3. The petitioner is an Indian company engaged in the
construction business. On 30.10.2002, the
petitioner filed its return of income under Section
139(1) of the Act. The petitioner declared an
income of Rs.2,26,07,425/-. The petitioner during
the said financial year credited certain prior period
incomes and debited certain prior period expenses
to its profit and loss account. The petitioner
disclosed this fact in the Notes to the Accounts in
its financial statement for the year 2001-02, which
were filed alongwith the return of income. The
return of the assessment was accepted by the
Assessing Officer and assessment order dated
28.02.2005 was passed under Section 143(3) of the
Act and no addition/disallowance was made in the
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W.P.(C) 2250/2012 Page 2 of 12
assessment order.
4. On 31.10.2006, the petitioner was served with a
notice under Section 148 of the Act for reopening
of the assessment on the ground of escapement of
income. In response to the said notice, the
petitioner on 15.12.2006 filed the same return as
had been originally filed under Section 139(1) of
the Act under protest and further requested the
respondents to furnish the reasons recorded for
reopening of assessment under Section 147/148 of
the Act.
5. On 05.02.2007, the reasons were furnished by the
respondent. The reason for reopening of the
assessment as communicated to the petitioner is as
under:-
"It has come to my knowledge that the assessee
has debited a sum of Rs.1,20,765/- in the P&L
account on account of prior period expenses after
netting income of Rs.30,34,463/- and
expenditure of Rs.31,55,228/-. The expenditure
of Rs.31,55,228/- has not been crystallized
during the year 2001-02 relevant to the
assessment year 2002-03, such prior period
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W.P.(C) 2250/2012 Page 3 of 12
expenses should have been disallowed.
Therefore, I have reason to believe that the
assessees income amounting to Rs.31,55,228/-
has escaped assessment. Notice u/s 148 of the
I.T. Act issued to the assessee for the assessment
of the assessees income."
6. The petitioner vide its letter dated 16.03.2007 filed
objections to the notice under Section 148 of the
Act and the reasons recorded by the respondent for
issuance of the same.
7. The petitioner contended that there was no failure
on the part of the petitioner to disclose fully and
truly all the material facts and that all primary and
material facts were placed before the Assessing
Officer during the course of the assessment
proceedings for the subject assessment year and the
relevant material was duly disclosed in Schedule 10
of the Notes to the Accounts of the financials for
the relevant year and no new material had come to
the knowledge of the Assessing Officer and that he
had acted on the basis of mere suspicion.
8. By the impugned order dated 15.03.2012, the
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W.P.(C) 2250/2012 Page 4 of 12
respondent dealt with the objection raised by the
petitioner qua initiation and rejected the same.
With regard to the issue of change of opinion and
the fact that true and complete disclosure had been
made by the petitioner, the finding recorded in the
impugned order is as under:-
"4.2 Coming to the second objection
regarding the proceedings being based on
"mere change of opinion", the law on this
count is also equally settled that mere
change of opinion will not confer
jurisdiction on the Assessing Officer.
Now the question arises what constitutes a
change of opinion. The very expression
,,Change of opinion suggests that an
opinion of sort must have been formed by
the Assessing Officer in the earlier
proceedings which he seeks to alter or
revise in the subsequent proceedings. In
the instant case in the earlier assessment
proceedings the AO has neither applied his
mind to the issue involved nor can he be
said to have formed an opinion in respect
thereof. Therefore, in the proceedings at
hand, it cannot be said to be a case of
change of opinion. The case law cited by
the assessee on the point are
distinguishable on facts and therefore do
not help the cause of the assessee. "
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W.P.(C) 2250/2012 Page 5 of 12
9. Aggrieved by the said order, the petitioner has filed
the present petition. We have examined the record
of the case and also the Income Tax Returns
originally filed and are of the view that the re-
opening cannot be sustained.
10. The petitioner in Schedule 10, Notes to the
Accounts, has mentioned as under:-
12. Details of Prior Period Adjustment.
Current Previous
Year Year
Amount Amount
(Rs.) (Rs.)
Expenditure - -
Subcontract costs 2,911,573 -
Interest Paid 243,655 -
Royalty - -
Income - -
Material Cost (1,986,566) -
Project Related (1,047,897) -
Income
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W.P.(C) 2250/2012 Page 6 of 12
Net 120,765 1,661,890
The Petitioner claims to have further made a
disclosure in the notes to computation of income as
under:
"11. Prior period expenses (Net) Rs. 120,765
(after adjusting prior period income of Rs.
3,034,463) have been claimed in the present
assessment year as liability in respect thereof
was crystallized/settled during the year"
11. The law in respect of reopening of the assessment
under Section 143(3) of the Act is no longer res
integra and has been the subject matter of various
judicial pronouncements. In the recent decision of
the Full Bench of this High Court in Commissioner
of Income Tax-VI, New Delhi vs. Usha
International Limited (2012) 348 ITR 485 (Del)
FB, one of us (Sanjiv Khanna, J) speaking for the
majority held as under:-
"5. For reopening an assessment made under
Section 143(3) of the Act, the following conditions
are required to be satisfied:-
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W.P.(C) 2250/2012 Page 7 of 12
(i) The Assessing Officer must form a tentative
or prima facie opinion on the basis of material that
there is under-assessment or escapement of income;
(ii) He must record the prima facie opinion into
writing;
(iii) The opinion formed is subjective but the
reasons recorded or the information available on
record must show that the opinion is not a mere
suspicion.
(iv) Reasons recorded and/or the documents
available on record must show a nexus or that in fact
they are germane and relevant to the subjective
opinion formed by the Assessing Officer regarding
escapement of income.
(v) In cases where the first proviso applies, there
is an additional requirement that there should be
failure or omission on the part of the assessee in
disclosing full and true material facts. Explanation
to the Section stipulates that mere production of
books of accounts or other documents from which
the Assessing Officer could have, with due
diligence, inferred material facts, does not amount to
"full and true disclosure of material facts". (The
proviso is not applicable where reasons to believe
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W.P.(C) 2250/2012 Page 8 of 12
for issue of notice are recorded and notice is issued
within four years from the end of assessment year.)
12. It would be the proximity of the reasons with the
belief of escapement of income which would be the
determinative factor for reopening of the
assessment. The remoteness of the reasons would
obviate the possibility of a belief and would bring
the case in the realm of mere suspicion which
cannot be a ground for reopening of assessment.
13. The prior period expenses are eligible for deduction
during the current year provided the liability was
determined and crystallized during the relevant
year.
14. The reason to believe recorded by the Assessing
officer "that the assessee has debited a sum of Rs
1,20,765/- in the P & L account on account of prior
period expenses after netting income of Rs
30,34,463/- and expenditure of Rs. 31,55,228/-.
The expenditure of Rs. 31,55,228/- has not been
crystallized during the year 2001 02 relevant to
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W.P.(C) 2250/2012 Page 9 of 12
the assessment year 2002 03, such prior period
expenses should have been disallowed" is not based
on any material that had come to the knowledge of
the Assessing Officer. The Assessing Officers has
placed reliance on the notes to the accounts that
were available at the time of the scrutiny
assessment. But the notes also states that the prior
period expenses had crystallized/ settled in the
year. The reasons to believe recorded do not show
as to on what basis the Assessing Officer has
formed a reasonable belief that the said expenditure
had not crystallized during the year relevant to the
assessment year. It is apparent the Assessing
Officer suspects that the income has escaped
assessment. But mere suspicion is not enough. The
reasons to believe must record reasons, the reading
of which should demonstrate, that such a
reasonable belief could be formed on some basis/
foundation and was in fact formed by the Assessing
Officer that income has escaped assessment. No
such reasonable belief can be formed from the
reasons to believe recorded.
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W.P.(C) 2250/2012 Page 10 of 12
15. The words "reason to believe" indicate that the
belief must be that of a reasonable person based on
reasonable grounds emerging from direct or
circumstantial evidence and not on mere suspicion,
gossip or rumour. The reason to believe recorded
do not refer to any material that came to the
knowledge of the Assessing Officer whereby it can
be inferred that the Assessing Officer could have
formed a reasonable belief that the expenditure
referred to had not crystallized during the relevant
year. The reasons to believe recorded that income
has escaped assessment are not based on any direct
or circumstantial evidence and are in the realm of
mere suspicion. The requirement of law is "reason
to believe" and not "reason to suspect". In the
present case Since the reasons to believe recorded
indicate that the Assessing Officer has acted on
mere surmise, without any rationale basis, the
action of reopening of the Assessment is thus
clearly contrary to law and unsustainable.
16. In view of the above, the impugned order dated
15.03.2012 is, accordingly, set aside and the
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W.P.(C) 2250/2012 Page 11 of 12
proceedings initiated pursuant to notice dated
31.10.2006 are hereby quashed.
17. The writ petition is accordingly allowed with costs
of Rs.10,000/-.
SANJEEV SACHDEVA, J.
SANJIV KHANNA, J.
August, 23, 2013
st
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