ACIT, Circle-16(1) New Delhi Vs. The State Trading Corp. of India Ltd., Jawahar Vyapar Bhawan, Tolstoy Marg, New Delhi
April, 15th 2014
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "H": NEW DELHI
BEFORE SHRI SAMIM YAHYA, ACCOUNTANT MEMBER
SHRI A. T. VARKEY, JUDICIAL MEMBER
ITA No. 2917/Del/2012
(Assessment Year: 2003-04)
ACIT, The State Trading Corp. of India
Circle-16(1) Ltd., Jawahar Vyapar Bhawan,
New Delhi Vs.
Tolstoy Marg, New Delhi
Appellant by : Kamal Jaitley, Adv.
Respondent by: Sameer Sharma, Sr. DR
PER A. T. VARKEY, JUDICIAL MEMBER
This is an appeal filed by the Revenue against the order of the ld CIT(A)-XVI,
New Delhi dated 05.03.2012 for the Assessment Year 2003-04.
2. The grounds of appeal are as follows:-
"1. On the facts and in circumstances of the case the ld CIT(A) erred in
quashing the assessment made in pursuance of a validly issued not u/s
148 of the Income Tax Act, 1961.
2. On the facts and in the circumstances of the case and in law the learned
CIT(A) erred in not appreciating the fact that there was failure and
omission on the part of the assessee in not adding to its income a sum of
Rs. 27,53,323/- in Schedule 17 of the profit and loss account which was in
the nature of advance of capital nature and hence was not be allowed
as revenue expenditure.
3. On the facts and in circumstances of the case ld CIT(A) erred in not
appreciating the fact that the claim of the assessee regarding written off
a sum of Rs. 20,36,677/- was omission and failure on the part of the
assessee and hence action u/s 147/148 could be taken as per proviso to
section 148 of the Income Tax Act, 1961.
4. The appellant craves leave for reserving the right to amend, modify,
alter, add or forego and ground(s) of appeal at any time before or
during the hearing of appeal."
3. Apropos quashing the re-assessment made in pursuance of section 148 of the
Income Tax Act, 1961 (herein after ,,the Act).
4. The brief facts of the case is that the assessee is a company and had filed its
return of income along with duly added accounts and tax audit report on 12.11.2003,
subsequently it was revised on 31.03.2005 declaring a loss of Rs. 50,13,25,154/-. The
Page No. 2
assessment of the assessee for the Assessment Year 2003-04 was completed after
scrutiny in December, 2005 determining loss of Rs. 50,13,25,154/-. Thereafter, as Audit
scrutiny revealed that the assessee had debited advances write-off amounting to Rs.
27.53 lakh in schedule 17 in the profit and loss account and this according to audit
team were of capital nature and should have been disallowed and consequently
added back to the income of the assessee. And the omission to do so led to excess
computation of loss by Rs. 27.53 lakh involving potential tax effect of Rs. 10.12 lakh. The
reasons for re-opening is reproduced below:-
" 1) Incorrect Allowance of Capital Expenditure
Section 37 of Income Tax Act, 1961, provides that any expenditure not
being expenditure of capital nature or personal expenses of the assessee laid
out or expended wholly and exclusively for the purpose of business is allowable
as deduction in computation of income chargeable to tax under the head
,,Profit and Gains of Business".
The assessment of aforesaid assessee for the assessment year 2003-04
was completed after scrutiny in Dec. 2005 determining the loss of Rs.
50,13,25,154/-. Audit scrutiny revealed that the assessee had debited advances
write off amounting to Rs. 27.53 lakh in schedule 17 in the profit and loss
account. The advances were of capital nature and should have been
disallowed and added back to the income of the assessee. The omission to do
so led to excess computation of loss by Rs. 27.53 lakh involving potential tax
effect of Rs. 10.12 lakh.
2) Incorrect allowance of expenditure
Section 37 of Income Tax Act, 1961, provides that any expenditure not being
expenditure of capital nature or personal expenses of the assessee laid out or
expended wholly and exclusively for the purpose of business is allowable as
deduction in computation of income chargeable to tax under the head "Profit
and Gains of Business".
The assessment of aforesaid assessee for the Assessment Year 2003-04
was completed after scrutiny in December, 2005 determining the loss of Rs.
50,13,25,154/-. Audit scrutiny revealed that the assessee had debited claim write
off amounting to Rs. 2036.97/- lac in schedule 17 in the P&L account. The
advances were of capital nature and should have been disallowed. Omission
to do so resulted in under assessment of income by like amount involving
potential tax effect of Rs. 748.58 lakh."
5. Thereafter the Assessing Officer issued a notice u/s 154/155 dated 27.01.2010,
duly enclosing copies of audit objections dated 21.12.2007 and 26.03.2007 issued by
the Senior Audit Officer who had held that both the write-off advances were of capital
6. The assessee filed its reply to the notice u/s 154/155 as per its letter dated
09.02.2010, giving complete information about the write-off and claimed that it was
pertaining to business activities of the assessee carried out on trading account and
none of it was on capital account. According to the assessee more than 95% of the
Page No. 3
claim for write-off was in respect of dues from the Central Government in respect of
canalized items imported for trading purpose on behalf of Govt. of India as per Govt.
Instructions, on which income tax has already been paid, when the sale took place.
Therefore the assessee requested the Assessing Officer to drop the rectification
proceedings in view of the fact that the transactions were purely on trading account
and not on capital account as alleged by the Audit Party.
7. Not satisfied with the aforesaid reply of the assessee, the Assessing Officer went
ahead with the re-assessment proceeding and held that the assessee had wrongly
claimed written-off claim amounting to Rs. 20,36,96,677/- and therefore it was added
back to the income of the assessee.
8. Aggrieved by the said disallowance, the assessee preferred an appeal before
the ld CIT(A), who vide the impugned order was pleased to quash the reassessment
order. Aggrieved by the said order of the ld CIT(A) the revenue is before us.
9. The ld DR contended that the assessee had debited advances write-off amount
of Rs. 27.53 lacs in Schedule 17 in the Profit and Loss Account. Since the advances
were of capital nature it should not have been allowed and therefore the Assessing
Officer rightly found the error and after duly serving the statutory notice has reassessed
and added back the same to the income of the assessee. The ld DR also contended
that the assessee company has not submitted any reply as to what steps it had taken
to recover the said amount which were written-off. Therefore according to the ld DR, it
was rightly disallowed by the Assessing Officer and relied upon the order of the
Honble Supreme Court in CIT Vs. PVS Beedies Pvt. Ltd (1999) 237 ITR 13. On the other
hand the ld AR pointed our attention to the reasons recorded by the Assessing Officer
to reopen the assessment which was completed u/s 143(3), which has been
reproduced above in para 4 and contended that the Assessing Officer has
acknowledged that for the Assessment Year 2003-04 which is the relevant Assessment
Year under consideration, assessment was completed after scrutiny u/s 143(3) of the
Act in December 2005, declaring a loss of Rs. 50,13,25,154/-. In the said reasoning it has
been specifically stated that the audit scrutiny revealed that the assessee had debited
advances write-off amounting to Rs. 27.53 lakh in schedule 17 in P&L Account and
since the advances were of capital nature it should have been disallowed and
omission to do so resulted in under assessment. So according to the ld AR from the
reasoning recorded by the Assessing Officer itself it is clear that the scrutiny assessment
u/s 143(3) was carried out in the case of assessee for the relevant assessment year was
Page No. 4
completed as early as in December 2005 and the reopening was ordered by the
Assessing Officer not on the basis of any new information from any source but it was
ordered on the basis of the audit observation, which cannot be termed as information
to facilitate the reopening of the assessment which was completed u/s 143(3) of the
Act. The ld AR brought to our attention the case of CIT Vs. Kelvinator of India Ltd. 320
ITR 561 (SC) and relied upon the order of the Delhi High Court in the same case to
support the said preposition.
10. We have heard both the parties and have perused the records of the case and
case laws cited by the parties.
11. Since all the facts were brought before the Assessing Officer during the original
scrutiny assessment as early as of the year 2006, it is evident that the assessee had
disclosed all material facts truly and fully and the said assessment cannot be disputed
after a period of four years from the end of the relevant assessment year on mere
change of opinion. We find force in the argument of the ld AR that the action of
Assessing Officer u/s 148 proceedings tantamount to review of the order passed by his
predecessor and it can only be termed as change of opinion. The Delhi High Court in
the case of CIT Vs. Orient Craft Ltd 354 ITR 536 (Del) held as under:-
"There was no fresh material which came to the notice of the Assessing Officer
after the original return was processed under section 143(1) and having regard
to the orders of the Tribunal (supra) and the instruction of the CBDT dated 23 rd
February, 1998 regarding the treatment to be given to the premium received on
transfer of quotas, there was no escapement of income and thus the notice
was without jurisdiction.
As decided in CIT vs. Kelvinator of India Ltd.[2010 (1) TMI 11 - SUPREME COURT OF
INDIA] AO has no power to review, he has the power to reassess. But
reassessment has to be based on fulfillment of certain preconditions and if the
concept of "change of opinion" is removed, as contended on behalf of the
Department, then, in the garb of reopening the assessment, review would take
place. One must treat the concept of "change of opinion" as an in-built test to
check abuse of power by the Assessing Officer. The reasons to believe must
have a material bearing on the question on escapement of income. It does not
mean a purely subjective satisfaction of the assessing authority; the reason be
held in good faith and cannot merely be a pretence.
The reasons disclose that the AO reached the belief that there was escapement
of income "on going through the return of income" filed by the assessee after he
accepted the return under Section 143(1) without scrutiny, and nothing more.
This is nothing but a review of the earlier proceedings and an abuse of power by
the AO both strongly deprecated by the Supreme Court in CIT vs. Kelvinator
(supra). The reasons recorded by the AO in the present case do confirm
apprehension about the harm that a less strict interpretation of the words
"reason to believe" vis-a-vis an intimation issued under section 143(1) can cause
to the tax regime. There is no whisper in the reasons recorded, of any tangible
Page No. 5
material which came to the possession of the assessing officer subsequent to
the issue of the intimation. It reflects an arbitrary exercise of the power
conferred under section 147 - substantial question of law answered in favour of
12. And the judgment of Honble Delhi High Court was approved by the Supreme
Court in the case of CIT Vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC) wherein the
Apex court held as under:-
"One needs to give a schematic interpretation to the words "reason to believe"
failing which, we are afraid, Section 147 would give arbitrary powers to the
Assessing Officer to re-open assessments on the basis of "mere change of
opinion", which cannot be per se reason to re-open. We must also keep in mind
the conceptual difference between power to review and power to re-assess.
The Assessing Officer has no power to review; he has the power to re-assess. But
re-assessment has to be based on fulfillment of certain pre-condition and if the
concept of "change of opinion" is removed, as contended on behalf of the
Department, then, in the garb of re-opening the assessment, review would take
place. One must treat the concept of "change of opinion" as an in-built test to
check abuse of power by the Assessing Officer. Hence, after 1st April, 1989,
Assessing Officer has power to re-open, provided there is "tangible material" to
come to the conclusion that there is escapement of income from assessment.
Reasons must have a live link with the formation of the belief.
Our view gets support from the changes made to Section 147 of the Act, as
quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987,
Parliament not only deleted the words "reason to believe" but also inserted the
word "opinion" in Section 147 of the Act. However, on receipt of representations
from the Companies against omission of the words "reason to believe",
Parliament re-introduced the said expression and deleted the word "opinion" on
the ground that it would vest arbitrary powers in the Assessing Officer. We quote
hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989,
which reads as follows:
"7.2 Amendment made by the Amending Act, 1989, to reintroduce the
expression reason to believe' in Section 147.-A number of representations were
received against the omission of the words reason to believe' from Section 147
and their substitution by the opinion' of the Assessing Officer. It was pointed out
that the meaning of the expression, reason to believe' had been explained in a
number of court rulings in the past and was well settled and its omission from
section 147 would give arbitrary powers to the Assessing Officer to reopen past
assessments on mere change of opinion.
To allay these fears, the Amending Act, 1989, has again amended section 147
to reintroduce the expression has reason to believe' in place of the words for
reasons to be recorded by him in writing, is of the opinion'.
Other provisions of the new section 147, however, remain the same. "
For the afore-stated reasons, we see no merit in these civil appeals filed by the
Department, hence, dismissed with no order as to costs. "
13. In the impugned order before us, the ld CIT(A) has held as follows:-
"3.5 It is also pertinent to mention that in the instance case before the
reassessment order in question (which is in appeal before the undersigned), the
Page No. 6
assessment has been completed on similar set of facts u/s 143(3)/147 vide order
dated 24.11.2006. Then again reopening has been done and another order has
been passed as on 29.12.2006. Then again reopening has been done and
another order has been passed as on 29.12.2009 vide order u/s 147 read with
section 143(3) of the IT Act. Thus, in view of the aforementioned judgment and
as well as the judgments relied upon by the appellant, clear position of law and
facts of the case, I am of the considered view that there was no ground to
believe that there was any escapement of income. It is also observed that the
Assessing Officer has not shown anywhere in the reasons that how and in what
manner the assessee company failed in disclosing all materials facts fully and
truly. Therefore it is held that the reassessment order passed u/s 147 is without the
authority of law and same is hereby quashed. As reassessment order has been
quashed, grounds No. 1,2 and 3 are allowed in favour of the appellant."
14. The ld DR relied on the case of CIT Vs. PVS Beedies Pvt. Ltd (1999) 237 ITR 13, and
the ld DR strenuously argued that the re-opening of the assessment based on audit
observation has been held to be valid in the light of the decision of Apex Court, in the
said case, wherein the Honble Court has held that
"the internal audit party had merely pointed out a fact which has been
overlooked by AO in the assessment. The fact that the recognition granted to
this charitable trust had expired on September 22,1972 was not noticed by the
Assessing Officer. This is not a case of information on a question of law. The
internal audit party was entitled to point out a factual error or omission in the
assessment. Reopening of a case on the basis of a factual error pointed out by
the audit party is permissible under the law. Therefore, the reopening of the
assessment was valid."
15. However it has been seen in the decision of the Honble Supreme Court in the
case of Indian & Eastern Newspaper Society Vs. CIT 119 ITR 996 SC, wherein while
overruling its own decision in R.K. Malhotra ITD Vs. Kastu Bhai lal Bhai (1997) 109 ITR 537
(SC) held that:-
"the opinion of an internal audit party of the income-tax department on a point
of law cannot be regarded as "information" within the meaning of section
147(b) of the I.T.Act, 1961."
16. From a perusal of the records we find that the Assessing Officer has erred in
assuming jurisdiction without bringing in any new material adverse against the assessee
to initiate assessment proceeding u/s 147 of the Act and neither there was any ground
to believe that there was any escapement of income nor he has been able to show
that the assessee has not disclosed all material facts fully and truly. The impugned
order of the Assessing Officer was an exercise undertaken by him on a mere change of
opinion and it is not permissible in law. The question whether the expenditure is a
capital or revenue in nature is a mixed question of law and fact. When the assessee
had furnished all the material facts before the Assessing Officer and the assessment
was completed u/s 143(3) of the Act, the question whether the audit team can sit in
Page No. 7
judgment on the decision of the Assessing Officer and decide whether a particular
expenditure can be characterized as capital or revenue in nature and can substitute
its opinion/ finding in the form of an audit objection and whether the Assessing Officer
after receiving such an objection alone in the absence of any new material in his hand
other than the records which were submitted by the assessee before the Assessing
Officer during scrutiny assessment was before the Honble Supreme Court in Indian
Easter Newspaper Society (Supra) wherein it was held that the audit objection on
question of law cannot be the basis to form an opinion "reason to believe" in order to
reopen the assessment as envisaged in Section 147 of the Act; and therefore, the audit
team has no power to determine the mixed question of law and fact and decide
whether the impugned expenditure is capital in nature over the decision of the
Assessing Officer completed u/s 143(3) of the Act. From a perusal of the records it is
evident that the reopening of the assessment was done merely on the objection
pointed out by the audit team. And since the Assessing Officer cannot review the
order of his predecessor merely on the basis of an opinion brought to his notice by the
audit team, is not permissible. The Audit team had no authority in law to pronounce or
decide whether an expenditure is capital or revenue in nature and admittedly there
was no new material in the hands of the Assessing Officer other than the audit report
which triggered the re-opening and therefore the ld CIT(A) has rightly held that the
notice to reopen was merely based upon a change of opinion. Ld CIT(A) also has
pointed out that the complete books of account was truly produced by the assessee
and it was examined and accepted by the predecessor Assessing Officer in the course
of original scrutiny assessment proceeding u/s 143(3) of the Act. Ld CIT(A) is right in
holding that no notice u/s 148 of the Act can be issued on mere change of opinion as
has been held in a plethora of cases by the Apex Court and the jurisdictional High
Court. We concur with the finding of the ld CIT(A) that there were no new material as is
otherwise evident from the reasons recorded which can enable the Assessing Officer
to have ,,reason to believe that the income has escaped assessment. The ld CIT(A)
has made a finding that the balance-sheet of the assessee was a part of the return of
income which was assessed u/s 143(3) of the Act and after examining all the books of
account only the predecessor Assessing Officer has passed the order under section
143(3). Therefore the ld CIT(A) finds that the assessee fully and truly disclosed all the
facts during 143(3) proceeding. Since the Assessing Officer has not pointed out any
fault or failure in the impugned order which can be attributed to the assessee nor
could prove that the assessee did not disclose or had concealed any material facts
Page No. 8
during the earlier assessment proceeding completed u/s 143(3), he cannot re-open
and re-assess the assessment completed u/s 143(3) of the Act, and in the said
circumstances it was rightly held by the ld CIT(A) that the re-opening and resulting
disallowance was made by the Assessing Officer not because of any failure on the
part of the assessee but merely because of the different interpretation by the Assessing
Officer based on audit objections, which was not permissible in law as has been held
by Apex Court in the case of Kelvinator of India Ltd. (Supra). Therefore we are of the
considered opinion that the reopening of the assessment u/s 148 for the relevant
assessment year is not valid in the eyes of law and therefore we uphold the order of
the ld CIT(A) and dismiss the appeal preferred by the revenue.
17. We are not inclined to go into the merits of the other grounds as it would be an
exercise which is merely an academic and an exercise in futility and we are not
persuaded to do so and therefore both the grounds are dismissed.
18. In the result the appeal of the revenue is dismissed.
Order pronounced in the open court on 07.04.2014.
(SAMIM YAHYA) (A. T. VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
A K Keot
Copy forwarded to
4. CIT (A)
ITAT, New Delhi