IT/ILT : Where Head Office expenses claimed by non-resident assessee were allowed under section 44C only on basis of CA certificate but same had not been verified, in view of fact that CA certificate was considered by erstwhile Assessing officer in original assessment, reopening of assessment on such ground would amount to change of opinion and was not justified
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[2013] 37 taxmann.com 257 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'L'
Abu-Dhabi Commercial Bank Ltd.
v.
Deputy Director of Income-tax (IT)*
R.S. SYAL, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NO. 3441 (MUM.) OF 2010
[ASSESSMENT YEAR 2003-04]
[ASSESSMENT YEAR 2003-04]
JULY 19, 2013
Section 44C, read with section 147, of the Income-tax Act, 1961 and article 7 of Indo-UAE DTAA - Non-resident - Head office expenditure [Reassessment] - Assessment year 2003-04 - Assessee, a UAE based bank, claimed Head Office expenses allocated to its Indian branches - Same were allowed in original assessment under section 44C - Assessing Officer reopened assessment on ground that head office expenses claimed by assessee were allowed only on basis of CA certificate but same had not been verified - Whether since CA certificate was considered by erstwhile Assessing Officer in original assessment proceeding, reopening of assessment on such reason would amount to change of opinion - Held, yes - Whether since initiation of reassessment proceeding were not based on any material which would lead to escapement of income and also there was complete disclosure of facts by assessee in original assessment, reopening of assessment was not justified - Held, yes [Paras 16 & 18][In favour of assessee]
FACTS
| ■ | In the regular assessment proceedings, the assessee bank was allowed deduction in respect of head office administrative and supervision expenses under section 44C. | |
| ■ | The Assessing Officer initiated reassessment proceeding on ground that the head office expenses was allowed only on basis of CA certificate without actual verification of the same. The Assessing Officer issued notice for reassessment under section 148 after the period of four years from the end of the relevant assessment year. | |
| ■ | On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer for reopening of assessment. | |
| ■ | On second appeal, the assessees submitted that the reason recorded by the Assessing Officer did not lead to the conclusion with regard to the escapement of income or that any material fact was left to be disclosed in the original/regular assessment proceedings. |
HELD
| ■ | In the instant case, nowhere the Assessing Officer records that there is an escapement of income, what he says is that the expenses under section 44C are as per CA certificate, but the same has not been verified by the Assessing Officer. This again, goes against the department, because if the Assessing Officer initiating reassessment proceedings tread on this line, it would amount to change of opinion, as, in the regular assessment proceedings, the erstwhile Assessing Officer considered the CA certificate to come to some conclusion. [Para 16] | |
| ■ | On going through the evidence relied upon by the assessee and the reasons recorded by the Assessing Officer to initiate the instant reassessment proceedings and the various judgments. It is opined that the initiation of reassessment proceedings was not based on any material, which would lead to escapement of income and also that there was completed disclosure of facts by the assessee in the return and regular assessment stage. [Para 18] |
CASE REVIEW
Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332/137 Taxman 479 (Bom.) and Hindustan Oil Corpn. v. ITO [1986] 159 ITR 956/26 Taxman 336 (SC) (para 19) followed.
CASES REFERRED TO
Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332/137 Taxman 479 (Bom.) (para 9), Prashant S. Joshi v. ITO [2010] 324 ITR 154/189 Taxman 1 (Bom.) (para 10), Titanor Components Ltd. v. Asstt. CIT [2012] 20 taxmann.com 805 (Bom.) (para 11), CIT v. Kelvinator of India Ltd.[2012] 256 ITR 1/123 Taxman 433 (Delhi) (FB) (para 16) and Indian Oil Corpn. v. ITO [1986] 159 ITR 956/26 Taxman 336 (SC) (para 17)
F.V. Irani for the Appellant. Ajay Srivastava for the Respondent.
ORDER
Vivek Varma, Judicial Member - The instant appeal is filed by the assessee against the order of CIT(A) 10, Mumbai, dated 18.02.2010, wherein, the following grounds have been taken:
"(1) (a) The Commissioner of income-tax (Appeals)-10, Mumbai [hereinafter referred to as the CIT(A)] erred in confirming the action of Assessing Officer (AO) of reopening the assessment under section 147 r.w.s. 143(3) of the Income-tax Act.
(b) The CIT(A) ought to have held that the reopening of the assessment was void, in want of and/or excess of jurisdiction and otherwise contrary to the provision of the Income-tax Act and bad in law and consequently the CIT(A) ought to have cancelled/quashed the order passed by the AO.
(c) The CIT(A) ought to have appreciated that there was no income which had escaped assessment for the year under appeal by reason of any failure on the appellants part to disclose fully and truly all material facts necessary for the assessment.
2(a) The CIT(A) having stated in the body of the order under appeal that the appellants claim for head office administrative and supervision expenses he allowed only to the extent of limit prescribed under section 44C of the Act, erred in upholding the action of the AO, of withdrawing the deduction allowed under section 44C.
(b) The CIT(A) ought to have directed the AO to allow the entire head office expenses of Rs 1,98,01,876 without applying provisions of section 44C of the Act. The appellant submit that the entire amount allocated to the Indian branches is allowable as deduction as per the provisions of article 7(3) of the convention between the Government of U4 and the Government of India (hereinafter referred to as the Tax Treaty).
(c) Without prejudice to the appellants contention that the entire head office administrative and supervision be allowed, the appellants submit that the CIT(A) ought to have directed the AO to allow the deduction under section 44C of the Act in respect of such expenses.
3(a) The CIT(A) ought to have directed the AO to recompute interest under section 244A at Rs.3,95,69.903 as against Rs.3,40,23,764 computed by the AO.
(b) The CIT(A) ought to have directed the AO to grant interest up to date of receipt of refund as against up to date of issue of refund voucher.
(c) Without prejudice to the above, the appellants submit that the CIT(A) erred in considering the date of issue of refund voucher as 3l March. 2009 as against the correct date i.e. 29th April, 2009."
2. Ground No. 1 & 2 pertain to the initiation of reassessment proceedings under section 148.
3. The facts are that the regular assessment under section 143(3) was framed on 24.02.2006. The AO initiated assessment proceedings, wherein, the AO recorded the following reasons:
"In this case assessment order under section 143(3) was passed on 24.02.2006. Subsequently, it was observed that the assessee was allowed deduction of Rs. 34,91,912/- in respect of HO expenses under section 44C of the Act without its authentication/identification. The deduction was allowed on the basis of a CA Certificate only but without actual verification by the AO resulting in irregular allowance of Rs. 34,91,912/- leading to under assessment to this extent.
In view of the above, I have reason to believe that income has escaped assessment within the meaning of para (c) to the Explanation 2 below section 147 of the Act".
He, thereafter, issued notice under section 148 on 12.06.2008. The assessee filed a letter dated 24.03.3009, wherein, it raised its objections against the reopening.
4. The assessment under section 143(3)/148 was framed vide order dated 24.04.2009, wherein certain additions were also made. Aggrieved, assessee approached the CIT(A), against the reassessment proceedings and also on merits, who, in the appellate order, confirmed and sustained the action of the AO for reopening of the regular assessment, besides other grounds on merit.
5. Since, the CIT(A) also sustained the reassessment proceedings, as well as certain additions on merit, the assessee is now before the ITAT.
6. Before us, the AR submitted that grounds No.1 & 2 pertain to reassessment proceedings, which he shall take up first.
7. The AR pointed out, that for the initiation of reassessment proceedings, that too after four years, there has to be a positive ground with the AO to come to a conclusion that some/certain income has escaped assessment. The AR invited our attention towards the reasons, wherein the AO, for recording of the reasons, has used the word "observed" and has further noted in the reasons, "the deduction was allowed on the basis of CA Certificate only but without actual verification by the AO,………, leading to under assessment to this extent".
8. This, according to the AR, does not lead to the conclusion with regard to the escapement of income or that any material fact was left to be disclosed by the assessee in the original/regular assessment proceedings. The AR pointed out that in the regular assessment proceedings, the AO allowed the deduction of Rs. 34,91,912/-, after verification of accounts, details and considering the claim as made in the computation of income.
9. According to the AR, the AO proceeded on an entirely illegal premise to initiate reassessment proceedings. He, therefore, placed on record the decision of Hon'ble Bombay, High Court in the case of Hindustan Lever Ltd. v. R B Wadkar [2004] 268 ITR 332/137 Taxman 479, at page 337, the Hon'ble Bombay High Court observed,
"The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reason It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his Opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches the court, on the strength of the affidavit or oral submissions advanced.
Having recorded our finding that the impugned notice itself is beyond the period of four years from the end of the assessment year 1996-97 and does not comply with the requirements of the proviso to section 147 of the Act, the Assessing Officer had no jurisdiction to reopen the assessment proceeding which were concluded on the basis of assessment under section 143(3) of the Act. On this short count alone the impugned notice is liable to be quashed and set aside".
10. He also placed reliance on the decision of Prashant S. Joshi v. ITO [2010] 324 ITR 154/189 Taxman 1, wherein the Hon'ble Bombay High Court at page 159 observed,
"The Assessing Officer must have reason to believe that such is the case before he proceeds to issue a notice under section 147. The reasons which are recorded by the Assessing Officer for reopening an assessment are the only reasons which can be considered when formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. For it is on the basis of the reasons recorded and on those reasons alone that the validity of the order reopening the assessment is to be decided. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds. in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 that income has escaped assessment, must be determined with reference to the reasons recorded by the Assessing Officer".
11. He also placed reliance on the decision of Titanor Components Ltd. v. Asstt. CIT [2012] 20 taxmann.com 805, wherein Hon'ble Bombay High Court observed,
"Nowhere has the AO stated that there is any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Having regard to the purpose of the section, we are of the view that the power conferred by sec. 147 does not provide a fresh opportunity to the AO to correct an incorrect assessment made earlier unless the mistake in the assessment so made is the result of a failure of the assessment to fully and truly disclose all material facts necessary for assessment".
12. The AR has placed a number of decisions, since the ratio decided in all the decisions is "that the AO has not stated in the reason, with regard to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment",
13. From the documents, as placed from and regular assessment, nowhere it could be inferred, that the original assessment was framed pursuant to some wrong or inapt facts. The AR, therefore, prayed to quash the reassessment proceedings.
14. The DR on the other hand supported the order of the revenue authorities and also the initiation of the reassessment proceedings.
15. We have heard the arguments of both the sides. What we have to examine at our end, is to see whether at all there was any proof, leading to escapement of income or particulars of income in the period between completion of regular assessment and recording of reasons to initiate the instant reassessment proceedings. This is so because, as the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. (supra) has observed,
"It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reason The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record".
16. In the instant case, nowhere the AO records that there is an escapement of income, what he says is that the expenses under section 44C are as per CA Certificate, but the same has not been verified by the AO. This again, goes against the department, because if the AO initiating reassessment proceedings tread on this line, it would amount to change of opinion, as, in the regular assessment proceedings, the erstwhile AO considered the CA certificate to come to some conclusion. This aspect had been taken care by the Hon'ble Delhi High Court (FB) in the case of CIT v. Kelvinator of India Ltd. [2012] 256 ITR 1/123 Taxman 433, which now has been affirmed by the Hon'ble Supreme Court of India.
17. We are also aware of the decision of the Hon'ble Supreme Court in the case of Indian Oil Corpn. v. ITO [1986] 159 ITR 956/26 Taxman 336 at Page 958 (headnotes), it is observed,
"The facts, viz., what was done, what was being claimed by the London office and the difficulties in producing the accounts or the opinion of the auditors for which the Income Tax Officer had called the assessee, were all known to the Income-tax Officer at the time of making the original assessments. In spite of the same, the Income-tax Officer chose to assess the assessee by allowing the amounts as deductions. The opinion of the auditors for the assessment year 1963-64, that ten per cent would be a reasonable charge might be good information for which the assessments of the assessee could be reopened under clause (b) of section 147, but, on this basis, alone it could not be said that the assessee had failed to disclose fully and truly all basic facts at the time of the original assessments. There was no evidence or allegation that such an opinion was available with the assessee at or before the time of the original assessments. All the basic facts in this case were disclosed: it was, however, not disclosed as to what was the of opinion of the auditor regarding what was reasonable, allocation, having regard to the amount of work done on behalf of the assessee company, of the London office expenses. There was no conclusive evidence that at the relevant time, i.e., at the time of filing of the return before the assessments, such auditor's opinion about the reasonableness was there. Secondly, what would be reasonable-or not would be an inference of the auditor. The amounts spent, the nature of the work alleged to have been done by Burmah Oil Co. on behalf of the assessee and the basis of the allocation had been explained in reply to the queries made by the Income-tax Officer before the assessment. The Income-tax Officer had asked at one point of time for the auditor's opinion. It was stated that such opinion could not be supplied. In spite of the same, the Income-tax Officer did not choose to make a best judgment assessment and did not draw any adverse inference against the assessee. Therefore, it could not be held that there was failure to disclose fully and truly all basic facts.
To confer jurisdiction under clause (a) of section 147 to reopen an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, two conditions are required to be fulfilled: the first is that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to tax had been underassessed or escaped assessment, the second is that he must have reason to believe that such escapement or underassessment was occasioned by reason of the assessee's failure to disclose fully and truly all material facts necessary for the assessment of that year. Both these conditions are conditions precedent to be satisfied".
18. On going through the evidence relied upon by the assessee and the reasons recorded by the AO to initiate the instant reassessment proceedings and the various judgments, as quoted and reproduced here above, we are of the opinion that the initiation of reassessment proceedings was not based on any material, which would lead to escapement of income and also that there was completed disclosure of facts by the assessee in the return and regular assessment stage, as per the decision of Hon'ble Supreme Court of India in the case of Indian Oil Corpn. (supra), which the AO in regular assessment considered and also took his own view, which, according to us was reasonable and cannot call for initiation of reassessment proceedings.
19. In these circumstances, respectfully following various decisions of the Hon'ble Bombay High Court & Hon'ble Supreme Court of India, as referred to by us, we quash the initiation of reassessment proceedings. As a result, proceedings from the recording of reasons, issuance of notice under section 148 and all consequential proceedings are annulled.
20. Since we have annulled the proceedings, we do not see any reason to go into the merits, which become infructuous.
21. In the result, the appeal filed by the assessee is allowed.
Regards
Prarthana Jalan
__._,_.___
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