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October, 11th 2013

%     Judgment reserved on :                  10th July, 2013
      Judgment pronounced on:                 23rd August, 2013

+            W.P.(C) No.2250/2012

                                   ..... Appellant
            Through: Mr. Nageshwar Rao with Ms.
                     Sayaree B. Malik, Advocates


                                  ... Respondent
           Through: Mr. Sanjeev Sabharwal,




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

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

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

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
               "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

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

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. "

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)               -

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
              "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:-

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

             (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

             (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

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

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

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.

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

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

W.P.(C) 2250/2012                                           Page 12 of 12
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