IT: Where excess recovery of reimbursement of expenses was already shown as income by assessee and details of such recovery were also produced in original assessment, reassessment proceeding to tax said amount was invalid
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[2013] 37 taxmann.com 313 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'C'
Tristar Oceanic Services (P.) Ltd.
v.
Commissioner of Income-tax*
ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
IT APPEAL NOS. 1805 & 2195 (MAD.) OF 2012
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
MARCH 6, 2013
Section 4, read with section 147, of the Income-tax Act, 1961 - Income - Chargeable as [Excess recovery of expenses] - Assessment year 2006-07 - Assessing Officer reopened assessment of assessee on ground that assessee made excess recovery of reimbursement of expenses from its clients - Whether since figure of excess recovery was extracted from details furnished by assessee before Assessing Officer in original assessment proceedings and further amount of excess recovery was clearly shown as income by assessee in its profit and loss account, reopening of assessment being based on change of opinion was invalid - Held, yes [Paras 8 to 10][In favour of assessee]
FACTS
| ■ | The Assessing Officer issued notice under section 148 to the assessee stating therein that the assessee had under recovery as well as excess recovery of reimbursement of expenses relating to freight charges, custom duty from its customers and since short recoveries would amount to writing off same as bad debts but since assessee had continued business with such parties, short recovery warranted disallowance under section 36(1)(vii). | |
| ■ | The assessee objected reopening on ground that there was no short recovery from any of its clients and expenses were clubbed in different groups, but, recoveries were effected from each customer. When customer expenses incurred in relation to each customer was seen along with the recoveries effected, latter was always in excess, such excess recovery was shown by it in its profit and loss account as income. | |
| ■ | The Assessing Officer rejected objection of the assessee and made addition of excess recovery of such expenses. | |
| ■ | The Commissioner (Appeals) while upholding reopening deleted addition made by the Assessing Officer. | |
| ■ | On second appeal: |
HELD
| ■ | The chart furnished by the assessee before the Assessing Officer, during the course of original assessment proceedings, had clearly given the expenses incurred by the assessee which it could recover from its clients and the amount it had recovered from the clients under various heads. Final result as appearing in audited profit and loss account was excess recovery of Rs. 40,07,549.70. Excess recovery reimbursed coming to Rs. 40,07,549.70 has been clearly shown as income. A schedule has also been appended to its balance sheet which once again shows item-wise expenses incurred by the assessee for which it could claim reimbursement and the expenses which it had recovered from its customers. The net effect is the sum of Rs. 40,07,549.70. [Para 8] | |
| ■ | Further the assessment order passed under section 143(3) read with section 147, pursuant to the reopening, shows the only addition shown therein for excess recovery of reimbursement is Rs. 40,07,550. This amount is already included as a part of assessee's income. Therefore, there is much strength in the argument of the assessee that the addition actually resulted in double taxation of the same income. One cannot presume that the Assessing Officer had not seen the profit and loss account and had not seen the sum of Rs. 40,07,549.70 shown by the assessee as a part of income. Despite a specific entry being there, the addition was made. Very relevant fact is that this addition had been deleted by the Commissioner (Appeals) for the simple reason that it resulted in duplication. Therefore, the Assessing Officer had made this addition only to save herself from the position that would have arisen if no addition was made based on the reason given for reopening. [Para 9] | |
| ■ | Further, there was no new material in the hand of the Assessing Officer for coming to a conclusion that assessee had made any under recoveries. Even if under recoveries were there, it was for the assessee to recover from its clients. To say that under recoveries will be equivalent to claim of bad debt is only a presumption taken by the Assessing Officer. That assessee had taken the credit of Rs. 40,07,550 in its profit and loss account after netting off short and excess recoveries, is clearly mentioned in the reason for reopening itself. Thus not only the reassessment proceedings were initiated on a mere change of opinion without any new tangible material, but also the addition made based on the reasons for reopening was only a camouflage, to get over the position of law that jurisdiction for reassessment was divested, the moment Assessing Officer found there was no addition for disallowance required to be made vis-à-vis the reason cited for reopening. Thus reassessment was invalid. [Para 10] |
CASE REVIEW
CIT v. Kelvinator of IndiaLtd. [2002] 123 Taxman 433 (Delhi)(FB) (para 10) followed.
CIT v. P.V.S. Beedies (P) Ltd. [1999] 103 Taxman 294 (SC) (para 10) distinguished.
CASES REFERRED TO
CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC) (para 5), Honda Siel Power Products Ltd. v. Dy. CIT [2011] 340 ITR 53/[2011] 197 Taxman 415/10 taxmann.com 2 (Delhi) (para 5.1), CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236/[2010] 195 Taxman 117 (Bom.)(para 6), Ranbaxy Laboratories Ltd. v. CIT [2011] 336 ITR 136/ 200 Taxman 242/12 taxmann.com 74 (para 6), CIT v. Ram Singh [2008] 306 ITR 343 (Raj.) (para 6), CIT v. P.V.S. Beedies (P) Ltd. [1999] 237 ITR 13/103 Taxman 294 (SC) (para 7) and CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1/123 Taxman 433 (Delhi)(FB) (para 10).
N.R. Agrawal for the Appellant. Pragati Kumar for the Respondent.
ORDER
Abraham P. George, Accountant Member - These are appeals of the assessee and Revenue, directed against an order dt. 29th Aug., 2012 of CIT(A)-III, Chennai. Since one of the grounds raised by the assessee questions the validity of reopening, this issue is dealt with first.
2. As per the assessee, reopening for the impugned assessment year was done on a change of opinion and the Revenue based on materials, which were with it at the time of original assessment. Argument of the assessee is that the original assessment having been completed under s. 143(3) of IT Act, 1961 (in short 'the Act'), reopening within four years was bad in law. It was simply based on change of opinion, even if such opinion was caused due to audit objections.
3. Facts apropos are that assessee, a customs house clearing agent, had filed its return for the impugned assessment year on 25th Nov., 2006, declaring an income of Rs. 26,79,743. The assessment was completed under s. 143(3) on 23rd Dec., 2008 determining the income at Rs. 26,84,165. Thereafter, notice under s. 148 was issued to the assessee on 31st March, 2011 and the reasons for reopening mentioned were as follows:
"It is seen from the details filed by the assessee on reconciliation of income as per TDS certificates and that as per P&L a/c, there are major short recoveries in respect of claim of reimbursement of expenses as follows:
| Nature of expenses | Incurred by the assessee | Recovered from customers | Short recovery/Bad debts | |
| Freight charges | 3,67,63,515 | 3,65,50,586 | 2,12,926 | |
| MBPT charges | 14,41,202 | 12,06,747 | 84,310 | |
| Custom duty | 1,29,07,160 | 1,28,22,850 | 84,310 | |
| THC charges | 1,60,22,361 | 1,15,07,580 | 45,14,781 | |
| Transport charges | 4,11,26,144 | 1,88,51,548 | 2,22,74,596 | |
| Total | 2,73,21,068 |
i.e, the assessee had short recovered (no customs expenses) an amount of Rs. 2,73,21,068 in respect of the above heads. In the P&L a/c, the assessee has offered
| ♦ | Excess recovery of reimbursement Rs. 40,07,550 after netting off short and excess recoveries outside the P&L a/c in case of expenses incurred and reimbursed. | |
| ♦ | Also, the sundry debtors balance as on 31st March, 2006 amounts to only Rs. 1,99,51,177. | |
| ♦ | Hence, the short recovery needs to fulfil the tests stipulated under s. 36(2) of the IT Act, 1961, as the above short recoveries would amount to writing off the same as bad debts. Since the assessee has continued business with the above parties, the short recoveries to the tune of Rs. 2,73,21,068 on account of reimbursement expenses warrants disallowance under s. 36(1)(vii) of the IT Act, 1961." |
Assessee, in response to such notice, filed objections against the reopening. In such objection, it was pointed out by the assessee that there was no short recovery from any of its clients. As per the assessee, expenses were clubbed in different groups, but, recoveries were effected from each customer. When customer expenses incurred in relation to each customer was seen along with the recoveries effected, latter was always in excess. Such excess recovery was shown by it in its P&L account as income. Head-wise computation of the excess recovery was also given as Sch. 20 to the P&L a/c. Such net recoveries accounted as income, as per assessee, came to Rs. 40,07,549.70.
4. However, AO chose to proceed with reassessment despite the objections raised by the assessee. During the course of such reassessment proceedings, AO found that there were indeed excess recoveries under certain heads and under recoveries in certain other heads, but in overall, there was a positive figure, i.e. net amount was an excess recovery. As per the AO, there was under recoveries of Rs. 4,11,21,241 and excess recovery of Rs. 4,49,39,823 from the clients during the relevant previous year and assessee was therefore required to offer such excess amount of Rs. 40,07,550 as income. Thereafter, reassessment was completed by making an addition of Rs. 40,07,550 towards excess recoveries from customers. In addition, there were disallowances totalling to Rs. 8,44,29,762 on various expenses incurred by the assessee on which tax was not deducted at source, applying s. 40(a)(ia) of the Act.
5. Assessee moved in appeal before CIT(A) arguing that the reopening was only on a change of opinion. According to assessee, the excess recovery finally added by the AO was already a part of its income specifically shown in P&L a/c. Therefore, as per the assessee, what resulted was a double addition. Further, according to assessee, it had filed a detailed chart of expenses and reimbursements during the course of original assessment. There was no new information with the AO which warranted reopening, other than an audit objection. There was no new tangible material before AO to conclude that income had escaped assessment. Assessee relied on the decision of Hon'ble apex Court in the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312.
5.1 However, CIT(A) was not impressed with regard to the challenge on 5 reopening. As per CIT(A), just because excess recovery was shown by the assessee in its P&L a/c, it could not be inferred that shortage of recoveries under specific heads was verified by the AO. As per learned CIT(A), assessee could not show how the issue regarding under recoveries was considered by the AO, in the course of original assessment proceedings. Again, as per learned CIT{A), specific details on recoveries were not called from the assessee by the AO, during the course of original assessment proceedings. Just because books of account were produced or other records were produced from which material evidence with due diligence could be adduced, would not satisfy the requirement of a disclosure contemplated under the Act. According to him, there was no opinion formed by the AO at the first instance. There was a failure on the part of the assessee to disclose full and true particulars. Explanation 1 to s. 147 of the Act was applicable. Whether the omission to disclose was deliberate or inadvertent was irrelevant. As per learned CIT(A), once there was omission or failure on the part of the assessee, jurisdiction stood conferred on the AO for invoking his power for reopening. Reliance was placed on the decision of Hon'ble Delhi High Court in the case of Honda Siel Power Products Ltd. v. Dy. CIT [2011] 340 ITR 53/[2011] 197 Taxman 415/10 taxmann.com 2 by the learned CIT(A) for taking this view. Nevertheless CIT(A) was of the opinion that addition of Rs. 40,07,750 was not called for, since assessee had already entered such excess recovery in its P&L a/c. Thus, while holding that reopening was valid, CIT(A) deleted the addition made by the AO for the excess recovery of expenses.
6. Now before us, learned Authorised Representative, strongly assailing the orders of authorities below, submitted that AO simply made an addition with full knowledge that the assessee itself had included such amount as a part of its income. According to him, the sum of Rs. 40,07,550 finally added by the AO, pursuant to reopening, was the same amount which was a part of its income shown in the P&L a/c for relevant previous year. Despite this being brought to the notice of the AO, the addition was made. Such an addition was made by the AO only to circumvent the law laid down by the Hon'ble Bombay High Court in the case of CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236/[2010] 195 Taxman 117. As per learned Authorised Representative, Hon'ble Bombay High Court in the said decision, held that if an addition on any of the issues, which formed a reason for reopening, was not made, the power to continue with a reassessment was no longer with the AO. According to him, this view of Hon'ble Bombay High Court was followed by Hon'ble Delhi High Court in the case of Ranbaxy Laboratories Ltd. v. CIT [2011] 336 ITR 136/ 200 Taxman 242/12 taxmann.com 74 ,as also Hon'ble Rajasthan High Court in the case of CIT v. Ram Singh [2008] 306 ITR 343 In any case, according to him, it was clear from the reasons recorded by the AO that the figures taken were only from the details given by the assessee during the course of assessment proceedings. Such details and reconciliation were already with AO during the course of assessment proceedings. To presume that AO had not applied his mind will not be in accordance with law. AO had originally applied his mind and completed the assessment under s. 143(3) of the Act. It is not as though income returned by the assessee accepted as such. Certain disallowances were made by the AO and the income finally assessed was not what was returned by the assessee. Therefore, finding of the learned CIT(A) that AO had not applied his mind was incorrect. As per the learned Authorised Representative, reassessment was not valid having been initiated based on change of opinion.
7. Per contra, learned Departmental Representative, supporting the order of learned CIT(A), submitted that assessee might have produced certain records before the AO during the course of assessment proceedings; but, just by giving certain information from which with due diligence, some evidence could have been found, would not satisfy the requirement of full and true disclosure. Assessee had to make full and true disclosure of expenses incurred by it and reimbursed by its clients. According to learned Departmental Representative, reassessment could be done based on an audit objection where internal audit party had pointed out a factual error. In support of this, he relied on the decision of Hon'ble apex Court in the case of CIT v. P.V.S. Beedies (P) Ltd. [1999] 237 ITR 13/103 Taxman 294. As for the decision of Hon'ble Bombay High Court in the case of Jet Airways (I) Ltd. (supra), learned Departmental Representative submitted that here, it was not a case where AO had not made any addition on the issue on which reopening was resorted to. There was indeed an addition for excess recovery made by the AO. Just because CIT(A) deleted such an addition on assessee's appeal, would not mean that AO was divested of his powers to do a reassessment. In the cases relied on by the assessee, there were no addition in the original assessment order on the issues raised in the reopening notice. However, this was not the case here. According to him, the reopening was, therefore, validly initiated.
8. We have perused the orders and heard the rival submissions. Reasons given for reopening have been reproduced by us at para 3 above. First part of this itself clearly mentions that the figures given in the table were based on the details furnished by the assessee on reconciliation of its income as per TDS certificate as per P&L a/c. Details filed by the assessee before the AO, during the course of assessment proceedings, have been placed before us at paper book-I pp. 31 and 32 of the assessee. Freight charge of Rs. 3,67,63,512 mentioned in the table as incurred by the assessee is a figure given by the assessee therein and recovery of Rs. 3,65,50,586 from customers, is also appearing therein. Both of them were extracted as such from the details furnished by the assessee. Similar is the case of customs duty of Rs. 1,29,07,160 paid by the assessee and Rs. 1,28,22,850 recovered from the customers. What we find is that the chart furnished by the assessee before the AO, during the course of original assessment proceedings, had clearly given the expenses incurred by the assessee which it could recover from its clients and the amount it had recovered from the clients under various heads. Final result as appearing in paper book p. 32 was excess recovery of Rs. 40,07,549.70. Paper book p. 2 is a copy of the audited P&L a/c filed by the assessee along with its return. Income part thereof is reproduced hereunder :
| Schedule | 31 -3-2006 | 31 -3-2005 | ||
| Income | ||||
| Agency charges | 12,179,411.00 | 12,679,313.30 | ||
| Other income | 18 | 399,082.70 | 517,486.49 | |
| Excess recovery of reimbursement expenses | 20 | 4,007,549.70 | 3,546,677.54 | |
| Total income | 16,586,043.40 | 16,743,477.33 |
Excess recovery reimbursed coming to Rs. 40,07,549.70 has been clearly shown as income. A schedule has also been appended to its balance sheet, numbered as Sch. 20, which is also available at paper book pp. 16 and 17 which once again shows item-wise expenses incurred by the assessee for which it could claim reimbursement and the expenses which it had recovered from its customers. The net effect is the sum of Rs. 40,07,549.70.
9. Now we have a look at the assessment order passed under s. 143(3) r/w s. 147 of the Act, pursuant to the reopening, shows the only addition shown therein for excess recovery of reimbursement is Rs. 40,07,550. This amount is already included as a part of assessee's income. Therefore, in our opinion, there is much strength in the argument of the assessee that the addition actually resulted in double taxation of the same income. We cannot presume that AO had not seen the P&L a/c and had not seen the sum of Rs. 40,07,549.70 shown by the assessee as a part of income. Despite a specific entry being there, the addition was made. Very relevant fact is that this addition had been deleted by the CIT(A) for the simple reason that it resulted in duplication. Therefore, we are constrained to come to a conclusion that AO had made this addition only to save herself from the position that would have arisen if no addition was made based on the reason given for reopening.
10. Further, we find that there was no new material in the hand of the AO Tor coming to a conclusion that assessee had made any under recoveries. Even if under recoveries were there, it was for the assessee to recover from its clients. To say that under recoveries will be equivalent to claim of bad debt, in our opinion, is only a presumption taken by the AO. That assessee had taken the credit of Rs. 40,07,550 in its P&L a/c after netting off short and excess recoveries, is clearly mentioned in the reason for reopening itself. This in our opinion, considerably once again strengthens the argument of the learned Authorised Representative that the addition was made on the same amount, only to get over the law laid down by Hon'ble Bombay High Court in the case of Jet Airways (I) Ltd. (supra) as also that Hon'ble Delhi High Court in the case of Ranbaxy Laboratories Ltd. (supra). Thus, we find that not only the reassessment proceedings were initiated on a mere change of opinion without any new tangible material, but also the addition made based on the reasons for reopening was only a camouflage, to get over the position of law that jurisdiction for reassessment was divested, the moment AO found there was no addition or disallowance required to be made vis-a-vis the reasons cited for reopening. As held by Full Bench decision of Hon'ble Delhi High Court in the case of CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1/123 Taxman 433, AO must have reason to believe that there was escapement or income and such reason to believe should have occurred on account of omission or failure of the assessee to make a return of income or omission or failure of the assessee to disclose fully and truly material facts necessary for assessment. Compiling figures from the table produced by the assessee during the course of original assessment proceedings, would not suffice this requirement. Their Lordship in the case of Kelvinator of India Ltd. (supra) also held that after an assessment is completed under s. 143(3), a presumption could be raised that there was application of mind by the AO in terms of cl. (e) of s. 114 of Indian Evidence Act. As for the decision of Hon'ble apex Court in the case of P.V.S. Beedies (P.) Ltd. (supra) on which strong reliance was placed by the learned Departmental Representative, there the AO had in the original assessment allowed deduction under s. 80G for donations given by the assessee to a charitable trust, when the fact was that the recognition given to the said trust had expired prior to the relevant year. The information that the trust to which donation was made, was not recognized during the relevant year, came to the knowledge of the AO only when pointed out by internal audit party. This information was not available to the AO when the original assessment was completed. Hence, it was a fresh tangible material coming in the possession of AO. It was due to this reason, Hon'ble apex Court held the reopening to be valid. On the other hand, here the audit party had simply taken few figures from the details submitted by the assessee and reached an erroneous conclusion that there were under recoveries. In our opinion, the reopening was not validly initiated. We, therefore, allow ground No. 3 taken by the assessee and hold the reassessment to be invalid.
11. Since the reassessment is held invalid, other grounds taken by the assessee have become academic and have not been adjudicated. For the same reason, cross-appeal of the Revenue has also become infructuous.
12. In the result, appeal of the assessee is allowed, whereas, that of Revenue is dismissed.
Regards
Prarthana Jalan
__._,_.___
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