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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
                                  AND
                  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

                                         PAN AAACT0102F
                    (Appellant)          (Respondent)

                            Appellant by : Kamal Jaitley, Adv.
                           Respondent by: Sameer Sharma, Sr. DR

                                         ORDER
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 nature. 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 the assessee." 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. -Sd/- -Sd/- (SAMIM YAHYA) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated:07/04/2014 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi
 
 
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