High Energy Batteries (India) Ltd. vs ITO

Chitra Venkataraman, J.—Normally although a writ petition would not lie as against the notice of reopening of an assessment, yet, I am constrained to allow the writ petition for the simple reason that the notice is bereft of reasons for bringing the warranty charges under escaped assessment.

On notice, the Respondent has filed the counter. It is seen that on 9-3-2009, the Income Tax Officer issued a notice u/s 147 of the Income Tax Act, 1961 for reopening the assessment for the assessment year 2004-05. The Petitioner herein filed a letter on 13-8-2009 seeking the reasons for reopening of the same. By letter dated 8-10-2009, the Assistant Commissioner informed the Petitioner that an verification of the records, it was seen that the Assessee had opted to account the warranty obligation and charged a sum of Rs. 30 lakhs based on AS-29. The Respondent viewed that as AS-29 has not been recognized by the Income Tax Act, the warranty obligation has to be added back as income. Hence, as the Respondent has reason to believe that the income has escaped assessment, it was liable to be reopened. The Petitioner filed a reply on 12-8-2009. Objecting to the reopening of the assessment as to the assessability of the warranty charges as income, the Petitioner placed reliance on the decision of the Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. Commissioner of Income Tax, Chennai, , wherein the Apex Court pointed out that warranty becomes an integral part of the sale price of the product if the Assessee has a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation; consequently, the apex court held that the provision for warranty was an allowable deduction. In the circumstances, the Petitioner contended that the question of reopening the assessment does not arise. The Petitioner pointed out that except to say that AS-29 had not been recognized by the department, the notice does not disclose any other grounds for rejecting the claim. The Assessee has challenged the notice of reopening before this Court.

In the counter affidavit filed, referring to the decision reported in Dr. K. Nedunchezhian Vs. The Deputy Commissioner of Income Tax and The Commissioner of Income Tax, as well as Assistant Collector of Central Excise, Chandan Nagar, West Bengal Vs. Dunlop India Ltd. and Others, , the Respondent contended that when there is an efficacious remedy available under the Act, writ jurisdiction is not available to the Assessee to come before this Court challenging the notice. As regards the allegations that the Respondent had not followed the dictum of the Supreme Court and that the maintenance of accounts as per AS-29 not being recognized, the counter further says that unless and until the method of accounting is accepted by the department, the question of recognizing the method of accounting does not arise. Learned standing counsel appearing for the Respondent submitted that the decision relied on by the Petitioner reported in Rotork Controls India (P) Ltd. (supra), has no relevance to the present case, since the decided case relates to assessment years 1991-92, 1992-93, 1993-94 and 1994-95. Contending that the method of accounting has not been recognized by the department, rightly the officer has reopened the assessment. He further pointed out that it is open to the Petitioner to canvass all the materials before the authority concerned, since he had already filed an objection.

Heard the learned senior counsel appearing for the Petitioner as well as the learned standing counsel for the Respondents.

A perusal of the notice of reopening of the assessment shows that except for stating that AS-29 is not a recognised method of maintenance of accounts, there is hardly any material in the notice relied on as indicative of escapement of tax, thereby leading to reopening of the assessment. Considering the fact that the reason to believe that any income chargeable to tax has escaped assessment must be backed up by materials indicative of escapement of assessment of income or underassessment, the mere fact that the Accounting Standards under which the books of account are maintained is not recognised by the department, per se, is not a reason logical enough to provide a platform for discrediting the accounts maintained by the Assessee. As rightly pointed out by the learned senior counsel appearing for the Petitioner, although the counter elaborately dealt with the case, there are no reasons to sustain the proceedings initiated by the Respondent. In the absence of any material disclosed to warrant a reopening of the assessment u/s 148, the notice for reopening the assessment merits to be set aside by this Court. It is a well settled principle of law that the essential requirement for initiating reassessment proceedings u/s 147 read with Section 148 is that the assessing officer must have materials to form a reason to believe that any income chargeable to tax has escaped assessment for any assessment year.-and that the assessing officer shall record his reason for issuing notice as mandated u/s 148(2). Even though the decision relied on by the Petitioner viz., Rotork Controls India (P) Ltd. (supra), relates to assessment years 1991-92, 1992-93, 1993-94 and 1994-95, yet, principles of law stated therein have relevance to the issue on the deductibility of warranty charges. Hence, in the absence of any indication as to the materials available for reopening, it is difficult to accept the plea of the learned standing counsel for the Respondents that the reported decision has no relevance to the claim herein solely by reason of the reported decision rendered with reference to assessment years 1991-92 to 1994-95.

Dealing with the relevancy of the following Accounting Standards, in the decision reported in J.K. Industries Ltd. and Another Vs. Union of India (UOI) and Others, , the Apex Court pointed out as follows:

The core of accountancy is book-keeping. The rules of book-keeping are clear. For example, the value of a fixed asset mentioned in a balance sheet is based on cost which may involve subjective estimation of the amount to be apportioned. Similarly, the quantum of depreciation is again an estimate, which can vary depending on the persons preparing the accounts as to when and at what stage he wants to record the depreciation. Accounting Standards are an attempt to overcome some of these deficiencies of accountancy. Accounting Standards involve codification of fundamental accounting rules, rules which explain and standardize the application of the fundamental rules to a variety of uncertain situations like retirement, contingencies, intangibles, consolidation, merger etc. Accounting Standards basically attempt to reduce the subjectivity and lay down rules so as to arrive at the best possible estimates The object of Accounting Standards is to evolve methods by which accounting income is determined. The object behind the Accounting Standards is to evolve methods by which accounting income is determined, made more transparent and leave less and less room for subjective selection of methods and provide for more attention to the quality of estimates used in arriving at accounting income.

The Supreme Court pointed out that Accounting Standards and taxation of income are two independent subjects.

Going by the said decision, other than rejection of the Accounting Standards as not acceptable to the revenue, in the absence of any materials disclosed as indicative of underassessment or escaped assessment to reject the accounts, I have no hesitation in setting aside the notice of reassessment and hence, the same is set aside. It is open to the Respondents to issue such notice if they so deem fit, giving reasons for reopening the assessment. In the result, the writ petition is allowed. No costs.