IT: Once claim was examined, scrutiny assessment was framed and AO came to conclusion, such an assessment could not have been subjected to process of reopening by succeeding AO
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[2013] 35 taxmann.com 84 (Gujarat)
HIGH COURT OF GUJARAT
Siddhi Vinayak Transport
v.
Assistant Commissioner of Income-tax*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 1907 OF 2013
APRIL 22, 2013
Section 147, read with section 40(a)(ia), of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [To make disallowance under section 40(a)(ia)] - Whether when earlier Assessing Officer had framed scrutiny assessment and examined certain deductions thoroughly, thereafter, it is not open to latter Assessing Officer to re-open assessment on basis that earlier Assessing Officer had committed a legal error - Held, yes - Assessing Officer in scrutiny assessment found that assessee did not deduct TDS on labour payments - After considering assessee's explanation, he disallowed 20 per cent of said expenditure under section 40(a)(ia) - However, succeeding Assessing Officer sought to re-examine said issue on premise that entire expenditure had to be disallowed and Assessing Officer was not justified in limiting it to 20 per cent - Whether reassessment was not justified since succeeding Assessing Officer cannot doubt legality of a conclusion recorded by earlier Assessing Officer - Held, yes [Para 12] [In favour of assessee]
FACTS
| ■ | The assessee was a transport contractor. It did not deduct TDS on payment made on account of freight and labour. | |
| ■ | In scrutiny assessment, the Assessing Officer disallowed 20 per cent of said expenses under section 40(a)(ia). On appeal, the Commissioner (Appeals) deleted said disallowance and said decision was pending in appeal before Tribunal. | |
| ■ | Thereafter, the Assessing Officer initiated reassessment on ground that earlier Assessing Officer made an error in limiting such disallowance to 20 per cent as 100 per cent disallowance was called for. | |
| ■ | On appeal: |
HELD
| ■ | When the earlier Assessing Officer had framed scrutiny assessment and examined certain deductions thoroughly, it is thereafter simply not open to the latter Assessing Officer to re-open the assessment on the basis that the earlier Assessing Officer committed a legal error. Once the claim was examined, scrutiny assessment was framed and Assessing Officer came to the conclusion, such an assessment could not have been subjected to process of reopening. This is not to suggest that the revenue would be rendered without any remedy even in a case where the Assessing Officer committed a gross error in under-assessing income chargeable to tax. [Para 10] | |
| ■ | Section 263, of course, when the requirements laid down in the provisions are satisfied, empowers the Commissioner to take such an order in revision. However, the succeeding Assessing Officer cannot doubt the legality of a conclusion recorded by the earlier Assessing Officer in his assessment order, which was framed after scrutiny. [Para 11] | |
| ■ | It is not a case where the Assessing Officer, while framing original scrutiny assessment, did not examine the petitioner's claim of deduction. He was acutely conscious of such a claim and was also of the opinion that the entire claim was not required to be granted. He called for explanation of the assessee and after taking into consideration the explanation, made disallowance to the extent he was convinced to do. If, in the process, he made a legal error, the succeeding Assessing Officer cannot correct such an error, through the process of re-opening of the assessment. This is precisely, in the present case, what the respondent seeks to achieve. His reasons recorded clearly reflected such a state of affairs. He expresses his opinion that the disallowance which was limited to 20 per cent of the expenditure was not justified in law and the entire expenditure should have been disallowed. This cannot be the basis for re-opening of the assessment previously framed after scrutiny. [Para 12] | |
| ■ | In view of the above conclusion, the impugned notice was to be quashed. [Para 13] |
CASE REVIEW
Transwind Infrastructure (P.) Ltd. v. ITO [2013] 33 taxmann.com 404 (Guj.)[para 11] followed.
CASES REFERRED TO
Transwind Infrastructure (P.) Ltd. v. ITO [2013] 33 taxmann.com 404 (Guj.) (para 11).
Manish J. Shah for the Appellant. Sudhir M. Mehta for the Respondent.
ORDER
Akil Kureshi, J. - Heard learned counsel for the parties for final disposal of the petition.
2. Petitioner has challenged a notice dated 24.8.2012, as at AnnexureA to the petition, issued by the respondent-Assessing Officer under Section 148 of the Income Tax Act, 1961 (for short "the Act").
3. The petition arises in the following factual background:
3.1. The petitioner is a partnership firm. For the Assessment Year 2008-09 the petitioner filed its return of income on 26.09.2008 declaring total income of Rs.7,22,630/. Along with return, the petitioner also filed audited accounts, as statutorily required. Such return of the petitioner was taken in scrutiny by the Assessing Officer, who framed scrutiny assessment under Section 143(3) of the Act on 27.12.2010.
3.2. During such scrutiny assessment, Assessing Officer examined the requirement of tax deduction at source on a total labour charge payment of Rs.16.09 cores (rounded off), on which no tax was so deducted. Assessing Officer, after putting the petitioner to notice in the order of assessment, disallowed a sum of Rs.3.21 crores (rounded off), out of the abovenoted total labour payment charges.
3.3. The order of assessment was carried in appeal by the petitioner. One of the ground in such appeal was in respect of disallowance of said sum of Rs. 3.21 crores (rounded off). CIT (Appeals) passed the appellate order on 02.07.2012 and allowed the assessees objection to the disallowance of Rs. 3.21 crores (rounded off) made by the Assessing Officer. It is stated that such order of CIT (Appeals) is pending before the Tribunal, under an appeal filed by the Revenue.
3.4. On 24.08.2012 the respondent Assessing Officer issued a notice of reopening the assessment for the said Assessment Year 2008-09. At the request of the petitioner, he supplied the reasons recorded for issuing of such notice, which reads as under:
"Reasons for reopening of assessment u/s 147 of the Income-tax Act, 1961
In this case, the Assessee an Firm engaged in the business of Transportation had filed its return for A.Y.2008-09 on 26.09.2008 declaring income of Rs.7,22,630/. The case was completed in scrutiny manner under section 143(3) of the Act, on 27.12.2010 by determining taxable income of Rs.3,71,93,320/. On verification of the assessment records revealed that during the scrutiny assessment an amount of Rs.3,21,84,435/ was disallowed under Section 40(a)(ia). It was further noticed that in the scrutiny assessment disallowance of Rs.3,21,84,435/ made was 20% of Rs.16,09,22,175/ on account of freight payment. Under Section 40(a)(ia) whole expenditure was required to be disallowed for failure to deduct the tax at source whereas only 20% of the total expenditure on account of freight payment of Rs.16,09,22,175/ was made by the Assessing Officer on lump sum basis. Since, no provision for lump sum disallowance of expenditure under Section 40(a)(ia) of the Act, disallowance required to be made of Rs.16,09,22,175/ or the actual expenditure on which no tax was deducted through required to be deducted as per the provision of the Act.
Incorrect/short disallowance of expenditure Rs.12,87,37,740 (16,09,22,175 -3,21,84,435) on account of freight payment resulted in under assessment of income of Rs.12,87,37,740/ with consequent short levy of tax of Rs.5,81,98,082/ as shown below.
| Tax on Rs.12,87,37,740/ | Rs.3,86,21,322/ | |
| Surcharge @ 10% | Rs.38,62,132/ | |
| Education Cess/Secondary & Higher Ed. Cess @3% | Rs.12,74,503/ | |
| Total Tax | Rs.4,37,57,957/ | |
| Int. U/s.234B from 04/08 to 12/10 | Rs.1,44,40,125/ | |
| Total Tax & Interest | Rs.5,81,98,082/] |
In view of the above facts, I have reason to believe that Income has escaped assessment up to Rs.12,87,37,740/. Accordingly, assessment is reopened u/s 147 of the Income tax Act, 1961."
3.5. The petitioner thereupon, under its communication dated 24.01.2013, raised several objections to the reopening of assessment. Such objections were, however, rejected by the respondent, by an order dated 06.02. 2013. Hence, the petition.
4. Learned counsel for the petitioner raised following contentions in support of the prayers;
| (i) | That the entire issue of non-deduction of tax at source on the total labour payment charges of Rs.16.09 crores was examined by the Assessing Officer at length in the original order of assessment. He further stated that the extent to which he desired to disallow the expenditure is shown in the assessment order itself. In such order, he was of the opinion that 20% tax disallowance was justified. Thus, the Assessing Officer, having scrutinized the claim in the order of assessment, any attempt on behalf of the respondent to reopen of assessement on such basis, would be a mere change of opinion. | |
| (ii) | The counsel for the petitioner contended that the petitioner had, even to the limited extent of disallowance made by the Assessing Officer, carried the matter in Appeal. CIT (Appeals) had deleted the entire disallowance, after admitting additional evidence on record by virtue of third proviso to Section 147 of the Act and on the principle of merger, it would be wholly impermissible for the Assessing Officer to reexamine the entire issue when the CIT (Appeals) has already given his opinion. |
5. On the other hand, learned counsel Mr. Sudhir Mehta for the Department opposed the petition contending that since the petitioner did not produce necessary documents at the time of original assessment, the Assessing Officer made ad hoc disallowance. This, being not an order, notice for reopening came to be issued within a period of four years from the end of the relevant Assessment Year.
6. He further contended that before the CIT (Appeals), only the validity of disallowance made by the Assessing Officer was at issue in appeal filed by the assessee. Whether the entire expenditure could have been disallowed was never at issue before CIT (Appeals).
7. Having heard learned counsel for the parties and having perused documents on record, the following aspects mainly emerge;
| (a) | During the scrutiny assessment, the question of non-deduction of tax at source on labour payment charges of Rs.16.09 crores came up for consideration before the Assessing Officer. He, in fact, issued a notice to the assessee on 24.11.2010 and stated as under: | |
| "Complete details of expenses of Rs.16,37,42,549/, incurred on a/c of cartage, octroi and labour expenses is not filed till date. Further, partwise amount paid and TDS details is also not filed. You are requested to file all the details. It will be presumed that TDS is not properly deducted and amount of Rs.3,27,48,509/ being 20% will be disallowed u/s 40(a)(ia) of the IT Act" | ||
| In the final order of assessment, he devoted several pages to the petitioner's claim of deduction of labour payment charges. In paragraph 4 of the assessment order, he discussed the disallowance on account of non-deduction of TDS on cartage, labour and octroi expenses. In reply to the notice dated 24.11.2010, the assessee made averments as to why disallowance should not be made relying on provisions contained in Section 194 (c) of the Act. He, ultimately, rejected the assessee's contentions and concluded as under: | ||
| "In view of the above, contention of the assessee has no basis. However to be reasonable, 20% of the total payment i.e. Rs.16,09,22,175/ is disallowed u/s 40(a) (ia) of the IT Act. The disallowance comes to Rs.3,21,84,435." | ||
| (b) | It is this claim, which the Assessing Officer now seeks to reexamine by issuance of notice for reopening of the assessment. The reasons recorded by him clearly bring about this aspect. |
8. In the reason, he concluded that the Assessing Officer made disallowance at the rate of 20 per cent. However, the entire amount should have been disallowed and therefore, the disallowance of expenditure required to be made comes to Rs.12,87,33,740/ Therefore, he recorded that he had reason to believe that the income to the above extent chargeable to tax had escaped assessment.
9. It thus clearly emerges from the record that the Assessing Officer now wishes to re-examine the petitioner's claim of deduction on the premise that the earlier Assessing Officer made an error in limiting such allowance to 20% of the total expenditure. In his opinion, 100% disallowance was called for. To the extent that the Assessing Officer, in the scrutiny assessment, did not disallow 80% of the expenditure and limited the disallowance to 20%, had committed an error.
10. We are not examining the validity of the contention of the Assessing Officer, recorded in the form of reasons, for issuing the notice. We are limiting our observations to his assuming jurisdiction of re-opening of the assessment on such basis. When the earlier Assessing Officer had framed scrutiny assessment and examined certain deductions thoroughly, it was, thereafter, simply not open to the latter Assessing Officer to reopen the assessment on the basis that the earlier Assessing Officer committed a legal error. Once the claim was examined, scrutiny assessment was framed and Assessing Officer came to the conclusion with or without recording reasons in the assessment order, such an assessment could not have been subjected to the process of reopening. This is not to suggest that the Revenue would be rendered without any remedy even in a case where the Assessing Officer committed a gross error in underassessing income chargeable to tax.
11. Section 263 of the Act, of course, when the requirements laid down in the provisions are satisfied, empowers the Commissioner to take such an order in revision. However, the succeeding Assessing Officer cannot doubt the legality of a conclusion recorded by the earlier Assessing Officer in his assessment order, which was framed after scrutiny. In same what similar circumstance, we had in our judgment in case of Transwind Infrastructure (P.) Ltd. v. ITO [2013] 33 taxmann.com 404 (Guj.) made following observations :
10. From the above, it can be seen that the Assessing Officer was acutely conscious about the petitioner not having deducted tax on labour payment charges of Rs. 3.05 crores and the petitioner's contention that it was so done because provision for TDS was not applicable. He was not convinced by such explanation. He, however, for some strange reasons did not apply the provision of Section 40(a)(ia) of the Act instead made ad hoc disallowance of Rs. 25,60,000/ @ 8% of the total labour payment charges.
11.Whatever be the legality of such assessment, fact remains that, in the scrutiny assessment, the Assessing Officer had thoroughly and fully scrutinized the assessee's claim of deduction of labour expenditure. To the extent he was inclined to disallow the same, he did so. By no stretch of imagination it can be stated that the issue was not at large before the Assessing Officer in the original scrutiny assessment. Any reexamination of such a question at this stage would only amount to change of opinion. Remedy of reopening the assessment, therefore, was simply not available. In the decision of the Supreme Court in case of Commissioner of Income Tax Vs. Kelvinator of India Ltd. reported in [2010] 320 ITR 561 (SC) the Apex Court observed as under:
"On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, reopening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a goby and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much wider. However, 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 reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition 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 inbuilt test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to reopen, 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 reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer."
12. If the Revenue was of the opinion that the Assessing Officer erroneously and to the prejudice of the interest of the Revenue allowed certain claim, in a given situation, it would have been open for the appropriate authority to exercise revisional powers. However, once the claim was fully examined, power of reopening was simply not available.
12. Such observations would apply in the present case also. We make it clear that it is not a case where the Assessing Officer, while framing original scrutiny assessment, did not examine the petitioner's claim of deduction. He was acutely conscious of such a claim and was also of the opinion that the entire claim was not required to be granted. He called for explanation of the assessee and after taking into consideration the explanation, made disallowance to the extent he was convinced to do. If, in the process, he made a legal error, the succeeding Assessing Officer cannot correct such an error, through the process of reopening of the assessment. This is precisely, in the present case, what the respondent seeks to achieve. His reasons recorded clearly reflect such a state of affairs. He expresses his opinion that the disallowance which was limited to 20% of the expenditure was not justified in law and the entire expenditure should have been disallowed. We are afraid, this cannot be the basis for reopening of the assessment previously framed after scrutiny.
13. In view of the above conclusion, we are inclined to quash the impugned notice dated 24.8.2012. The question whether on the additional ground of merger, as flowing through the proviso to section 147 of the Act, the notice is bad in law, we have not gone into in this case.
14. Subject to the above observations, the petition is allowed. The impugned notice dated 24.08.2012 is quashed.
Regards
Prarthana Jalan
__._,_.___
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