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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 21st November, 2014
+ ITA 319/2014
COMMISSIONER OF INCOME TAX-VI ..... Appellant
Through Ms. Suruchi Aggarwal, Sr. Standing
Counsel.
versus
VALVOLINE CUMMINS LTD. ..... Respondent
Through Mr. Ajay Vohra, Sr. Advocate with
Ms. Kavita Jha, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J. (ORAL)
This appeal by the Revenue under Section 260A of the
Income Tax Act, 1961 (Act, for short), which pertains to
assessment year 2006-07, has to be dismissed, albeit for slightly
different reasons as recorded in the order dated 29 th November,
2012 passed by the Income Tax Appellate Tribunal (Tribunal,
for short).
2. The respondent-assessee had filed return of income
declaring income of Rs.9,52,15,517/- for the assessment year
2006-07 on 30th November, 2006. After issue of notice under
Section 143(2), assessment order under Section 143(3) was
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passed on 24th December, 2008 accepting the returned income.
3. Thereafter, re-assessment notice dated 30th March, 2011,
under Section 148 read with Section 147 of the Act, was issued.
The said notice and re-assessment order has been set aside by
the impugned order passed by the Tribunal dated 29th
November, 2012.
4. The "reasons to believe" as recorded by the Assessing
Officer for initiating re-assessment proceedings read as under:-
"The Income tax Act, 1961, provides that a
provision made in the accounts for an accrued
or known liability is an admissible deduction,
while other provisions made do not qualify for
deduction. It has been judicially held that for a
loss to be deductible, it must have actually
arisen and incurred and not merely anticipated
as certain to occur in future.
The assessment of M/s Valvoline
Cummins Ltd. for the assessment year 2006 -
07 was completed after scrutiny in Dec
2008 determining an income of
Rs.9,52.15.517/-. The assessee made and
was allowed provision for expenses
amounting to Rs.1,53,57,778/-. As the
provision towards an unascertained liability
is not allowable under the Act, it should
have been disallowed and taxed. The
omission resulted in underassessment of
income by Rs.1,53,57,778/- with
consequent tax effect of Rs.68,75,338/ -."
5. The first paragraph of the "reasons to believe" correctly
records that a provision made in accounts for an accrued and
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known liability is an admissible deduction. Thus, the amounts
shown under the head "provision" per se is not to be disallowed
as unascertained expenditure. In the second paragraph of the
"reasons to believe", the Assessing Officer after correctly
noticing the position in law in the first paragraph, contradicted
himself and erroneously recorded and inferred that provision for
expenses amounting to Rs.1,53,57,778/- were wrongly
allowed being an unascertained liability. The "reasons to
believe" do not state why and how the Assessing Officer came
to the conclusion that the provision for expenses of Rs.
1,53,57,778/-was an unascertained liability. This has not been
explained and clarified.
6. During the course of hearing before us, we had asked the
counsel for the Revenue to point out and show that on what
ground and reason the Assessing Officer came to the conclusion
that the amounts shown under the head "provision" was an
unascertained liability and not an accrued and certain liability.
Noticeably, the respondent-assessee was following the
mercantile system of accounting and any liability which had
been incurred was to be allowed as a deduction, even when
payment was not made in the said year.
7. The Commissioner of Income Tax (Appeals) in the first
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appellate order has reproduced schedule 13 of the balance sheet,
which for the sake of completeness is being reproduced below:-
"
"Schedule As at As at
13: March 31, 2006 March
Provisions Rs. 31,2005
Rs.
..................
Provision for 16,324,796 12,833,564
Expenses (refer not 2
below)
.............
Note 1 ............................
Note 2:
Provision
for
expenses
Opening 12,833,564 17,297,108
Provision
Provision 15,357,778 12,833,564
Made during the year
Amount used during the
year 11,866,546 17,297,108
Closing provision 16,324,796 12,833,564"
"
Thus, last year there were provisions and this year also provision
were made and there were payments. But, there is complete absence
and no material has been shown and brought on record to show that the
amount included under the head "provisions" represented
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"unascertained liability". Further, the Commissioner of Income Tax
(Appeals) has recorded that provision for commission of
Rs.35,09,021/- had been added back in the computation of income in
accordance with Section 40(a)(ia) of the Act, for want of deduction of
tax at source. The Assessing Officer overlooked this fact indicating
non-application of mind.
8. The "reasons to believe" must show live link and nexus with the
formation of prima facie opinion that income which should be taxed
has escaped assessment. In the absence of any cogent and relevant
material or information to show that the amount shown under the head
provision included unascertained liability, re-assessment proceedings
could not have been initiated. There is a difference between "reasons
to believe" and "reasons to suspect". Mere surmise or suspicion
cannot be a ground to reopen assessment.
9. It was the responsibility of the Revenue to bring on record
documents and material to show and establish that the "provisions"
related to unascertained liability and the Assessing Officer while
forming his opinion and recording "reasons to believe" was in
knowledge or aware of information or material to show that what was
shown under the head "provision" was not a certain and accrued
liability. In the absence of any material or information, "reasons to
believe" it has to be held were not relevant and meet the test of
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satisfaction required to sustain the reopening. Use of the heading or
word "provision" in the balance sheet it is apparent became the
material or information to reopen. The word/expression "provision"
by itself and alone without other information/material, would not
reflect and indicate unascertained liability. Thus, the assumption
drawn by the Assessing Officer in the "reasons to believe" is
farfetched, vague and a mere pretence. It is also extraneous and
irrelevant to the issue and formation of belief that "unascertained
liability" had been claimed and allowed as expenditure.
10. With the aforesaid observations, the appeal is dismissed.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
NOVEMBER 21, 2014
NA
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