Jagat Jayantilal Parikh vs Deputy Commissioner of Income Tax

Sonia Gokani, J.—The petitioner is an individual assessed in the same status for last several years under the income tax Act 1961 (for short, hereinafter referred to as "the Act"). The petitioner herein has challenged the validity of the notice issued u/s 148 of the income tax Act, 1961, dated November 21, 2011, seeking to reopen the assessment framed by the Assessing Officer on scrutiny u/s 143(3) of the Act for the assessment year 2007-08. The facts and details for appreciating the issue raised by the petitioner herein in the present petition under article 226 of the Constitution of India are as under.

1.1 The petitioner, in the assessment year 2007-08, declared his total income of Rs. 1,89,040 in the return filed by him u/s 139 of Act. The statement of income and the audit report u/s 44AB accompanied the return. In the audit report, under the heading of money market trading account-tax free reflected computation of the transaction. The petitioner had claimed a net loss of Rs. 13,22,953.43 in one account. All other accounts clubbed together had shown a net loss of Rs. 11,52,464.

1.2 A notice u/s 143(2) was issued on October 30, 2009. A letter was addressed by the petitioner-assessee to the Assessing Officer on November 9, 2009, inter alia, urging that qualitative particulars along with valuation had already been furnished in terms of the account. On the basis thereof, the Assessing Officer completed the scrutiny assessment u/s 143(3) and passed an order on December 14, 2009.

1.3 Subsequent thereto, it emerges from the record that the audit objection in this regard was raised. The Assessing Officer, of course, did not agree with office objection. However, on November 21, 2011, the petitioner received a notice u/s 148 of the Act for reopening of the assessment on the ground that the income of the petitioner has escaped assessment and he was directed to file his return within 30 days.

1.4 The return was submitted by the petitioner and the ground was raised in the communication dated December 20, 2011, that such reopening was in direct response to the audit objection which was untenable as advance sale securities is a regular feature in the petitioner''s business. Request was made for furnishing of copies of the reasons. The reasons were furnished, vide letter dated August 22, 2012, which are required to be reproduced as under :

It is seen that you had returned gross total salary income of Rs. 2,99,040 and gross business loss of Rs. 15,85,666 as per the statements of computation of total income. It is further, noticed that you have debited an amount of Rs. 1,24,31,189 towards ''provision for purchase (short sale-inclusive of interest) in the money market trading account and out of this, an amount of Rs. 52,65,699 had been credited towards ''provision for purchases reversed. The net loss of Rs. 13,22,953.43 of this money market trading account was debited to the profit and loss account and the net business loss of Rs. 11,52,464 was taken for computation of business income. After adjustment of various items, depreciation, etc., the net business loss of Rs. 15,85,666 was claimed to be carried forward for set off in future assessment years. Thus, allowance of the net provision of Rs. 71,65,489.92 (1,24,189.18 - 52,65,669) was not, therefore, laid out or expended wholly and exclusively for the purpose of business or profession and was, therefore, not an admissible expenditure leaving a provision only. Thus, there was escapement of taxable income for the assessment year 2007-08, and as such notice u/s 148 has been issued.

1.5 Objections were filed by the petitioner on September 5, 2012, wherein it is emphasized that the said notice is nothing but a mere change of opinion on the part of the Assessing Officer. Instead of dealing with these objections and pass any order, the Assessing Officer passed straightway an assessment order dated October 17, 2012, making an addition of Rs. 71,65,490 and sent a demand notice dated October 17, 2012, of Rs. 34,96,100.

1.6 Resultantly, this petition with a prayer to quash and set aside the notice.

On issuance of notice to the other side, affidavit-in-reply has been filed by the Deputy Commissioner of income tax, denying all the averments of the petition. It is urged that the notice has been issued as the income chargeable to tax has escaped the assessment and the reasons recorded are also provided for such reopening. The assessee also appeared during the reassessment proceedings and sought various details. It is further contended that the assessee-petitioner had not objected to such reopening. It is only after tax liability fixed to the tune of Rs. 34,96,100, such objection have been raised.

1.7 It is further contended that the petitioner has also filed an appeal before the Commissioner of income tax (Appeals) and on his having availed of alternative remedy, this petition is not maintainable.

Heard learned senior counsel, Mr. J.P. Shah, with the learned counsel, Mr. M.J. Shah, for the petitioner who submitted that the notice is based on one of the issues, already previously raised in the scrutiny assessment. The Assessing Officer had not applied his mind independently but acted on the objection of the audit party and reopening, therefore, is based on the change of opinion only. Learned counsel has also taken a firm stand that while issuing notice for reopening the assessment, action has been initiated at the instance of the audit party and, therefore also, notice is contrary to the well laid down ratio that any notice for reopening solely on the objection of the audit party without application of mind, cannot be sustained. He further urged that even the basis of the plea that the income chargeable to tax has escaped assessment, lacks validity. It is urged further that the Assessing Officer has proceeded to frame a fresh assessment without disposing of the objections of the petitioner separately and thereby, violated the ratio laid down by the apex court reported in GKN Driveshafts (India) Ltd. Vs. Income Tax Officer and Others, .

Learned counsel, Ms. Mauna Bhatt, has objected to entertain this petition preferred under article 226 of the Constitution of India. According to her, the Assessing Officer has independently examined the question. She has further submitted that the Assessing Officer had a reason to believe that the taxable income since has escaped assessment, the impugned notice requires no interference at this stage.

3.1 Learned counsel has also urged that the Assessing Officer, on the basis of the report of the audit party, has a right to form his own opinion with respect to escapement of the income and only because the indication has come from the audit party, that itself cannot be the ground of holding the opinion of the Assessing Officer invalid.

Upon thus hearing both the sides and also on perusal of the original file of the Assessing Officer pertaining to the assessment in question, this petition requires to succeed for the following reasons.

4.1 As can be noted from the submissions made by both the sides, on three grounds, the challenge is made to the notice of reassessment.

(i) On scrutiny assessment, the issue raised in the impugned notice has been finalized and, therefore, this notice of reopening is nothing but only a change of opinion on the part of the Assessing Officer.

(ii) The Assessing Officer proceeded to frame a fresh assessment without disposing of the objections by a separate reasoned order and thereby, violated the law on the subject.

(iii) Despite the initial disagreement of the Assessing Officer to the objections raised by the audit party, this notice of reopening is issued only at the instance of the audit party.

4.2 Taking, firstly, the last contention of the petitioner, it can be noted that for the assessment year 2007-08, a return of income was filed by the petitioner on October 31, 2007, giving all details and statements coupled with the audit report. A notice was issued by the Assessing Officer u/s 143(2) on October 30, 2009, which was replied to on November 9, 2009. It also enclosed along with the monthly particulars of the trading in G-Security, MMD and bonds by further mentioning that qualitative particulars with money value had already been given in the account. No further queries were raised and the assessment order was passed on December 14, 2009, on scrutiny, u/s 143(3) of the income tax Act taking into account all these aspects.

4.3 It appears that, subsequent to this, audit objections were raised in the following manner :

Under section 37 of the income tax Act, 1961, any expenditure, not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head ''Profit and gains of business or profession''.

The assessee, Shri Jagat Jayant Parikh, an individual, a dealer in securities, filed its return of income for the assessment year 2007-08 on October 30, 2007, declaring total income, including salary income at Rs. 1,89,040 u/s 143(1) of the income tax Act, 1961. The return was processed on March 19, 2009, accepting the same income. Thereafter, the return was selected for scrutiny u/s 143(3) and the same was finalized on December 24, 2009, determining total income Rs. 2,12,320.

Audit scrutiny of the assessment records revealed that the assessee had returned gross total salary income of Rs. 2,99,040 and gross business loss of Rs. 15,85,666 as per the statement of computation of total income. It is, further, noticed that the assessee had debited an amount of Rs. 1,24,31,189.18 towards provision for purchase (short sale-inclusive of interest) in the money market trading account and out of this, an amount of Rs. 52,65,699.26 had been credited towards provision for purchase reversed. The net loss of Rs. 13,22,953.43 of this money market trading account was debited to the profit and loss account and the net business loss of Rs. 11,52,464 was taken for computation of business income. After the adjustment of various items including depreciation, etc., the net business loss of Rs. 15,85,666 was claimed to be carried forward for set off in future assessment years.

Thus, allowance of the net provision of Rs. 71,65,489.92 (1,24,31,189.18 - 52,65,699) was not, therefore, laid out or expended wholly and exclusively for the purpose of business or profession and was, therefore, not an admissible expenditure being a provisionally.

This resulted in irregular allowance of expenses of Rs. 71,65,490 involving short levy of tax of Rs. 32,07,832 as mentioned below.

4.4 On the basis of such audit objection, notice had been issued to the petitioner on November 21, 2012, u/s 148 of the income tax Act, 1961, without furnishing a copy of the reasons recorded for reopening the assessment. The same were supplied to the assessee on August 29, 2012. The reasons recorded are as follows :

It will be appreciated that u/s 37 of the income tax Act, 1961, any expenditure, not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure of personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head ''Profit and gains of business or profession''.

It is seen that you are a dealer in securities. You filed a return of income for the assessment year 2007-08 on October 3, 2007, declaring a total income, including salary income at Rs. 1,89,040. The return was processed on March 19, 2009, accepting the same income. Thereafter, the return was selected for scrutiny u/s 143(3) and the same was finalized on December 24, 2009, determining a total income at Rs. 2,12,320.

It is seen that you had returned gross total salary income of Rs. 2,99,040 and gross business loss of Rs. 15,85,666 as per the statements of computation of total income. It is further noticed that you have debited an amount of Rs. 1,24,31,189 towards provision for purchase (short sale-inclusive of interest) in the money market trading account and out of this, an amount of Rs. 52,65,699 had been credited towards provision for purchases reversed. The net loss of Rs. 13,22,953.43 of this money market trading account was debited to the profit and loss account and the net business loss of Rs. 11,52,464 was taken for computation of business income. After adjustment of various items of depreciation, etc., the net business loss of Rs. 15,85,666 was claimed to be carried forward for set off in future assessment years. Thus, allowance of net provision of Rs. 71,65,489.92 (1,24,189.18 - 52,65,669) was not, therefore, laid out or expended wholly and exclusively for the purpose of business or profession and was, therefore, not an admissible expenditure leaving a provision only. Thus, there was escapement of taxable income for the assessment year 2007-08, and as such notice u/s 148 has been issued.

4.5 After such reasons were supplied to the petitioner which are similarly worded as the objection of the audit party, he addressed a letter dated October 8, 2012, to the Deputy Commissioner of income tax, containing specifically mat all these aspects have been duly examined and this is nothing but a change of opinion on the part of the Assessing Officer. It was also contended that the inquiry based on the report of the audit party cannot be the ground for reopening the assessment and the entire issue for which reopening was done, was examined in scrutiny assessment by stating thus.

(5) Sir, a sale is complete only when the delivery is made. The assessee maintains the books of account of the mercantile basis and, hence, a contract is recorded when prices tend to move in either direction on real time basis. However, a sale remains incomplete when the goods are not delivered. And it is for this reason that an incomplete sale cannot contribute to the profit or loss for any period. It is equally true that accounting entries do not create an income or expenditure and the court have ruled in a number of cases that income tax is not dependent on the accounting entries passed. Under the circumstances, the sales recorded in our books does not give rise to any surplus or loss. However, by way of abundant caution the assessee has balance a contractual sale (incomplete) by way of purchases MTM against these incomplete sales to ascertain the true profit for the said previous year, had the transaction was completed at the year end at prices prevailing on the last day of the previous year.

(6) Your honour''s observation that any provision in the books does not constitute expenditure and, hence, must be disallowed does not hold good ground. The proposal to tax the difference between the provision for purchase in the beginning of the year and the provision at year end is mere hypothetical and has no legal or account base. The description ''provision for purchase'' is a nomenclature to describe purchases at MTM for all pending sale deals and cannot be treated at par with any accounting provision to meet any contingent future liability.

4.6 In the instant case, we deemed it appropriate to call for the record of the Assessing Officer for our perusal.

4.7 It could be noticed from the said record that the Assistant Commissioner of income tax had serious objections to the said report of the audit party and vide his letter dated March 23, 2011, addressed to the senior audit officer, he, in his communication, ventilated his objections in the following fashion :

The main contention of the audit party is that the assessee has debited an amount of Rs. 1,24,31,189 towards the provision of purchase and out of this an amount of Rs. 52,65,699 has been credited towards provisions for purchase reverse. The provisions for the expenses is not admissible expenditure.

The audit objection raised is not acceptable as it is contrary to the facts of the case. It may be mentioned that every expenditure related to business transaction is allowable in income tax and when there is a determined and defined expenditure there is entry in the books of account. When such defined but in determined expenditure in incurred, it referred to as provision. This provision is allowable as the expenditure in the income tax Act. Only unascertained transactions when provided, are disallowed.

In the present case, the assessee is a dealer in securities, transactions of buying and selling are defined and determined. These are based on deals entered into at the relevant time. However, when sale-deal is entered into without holding the stock of the said script, these are settled by bought deal at a future date, either by delivery or settlement of difference in price prevailing on the date of settlement. In such cases, transactions are defined but purchase price is not determined till the date of settlement. It gets determined on the date of settlement.

When such a deal is entered into just prior to the date of annual closing day, i.e., before 31st March, the actual profit or the loss gets divided between two financial years. The same needs to be bifurcated based on the price prevailing on the last day of the financial year. Here, the assessee made the entries in the books for short sale of securities and provided for purchase of those securities on the last day of the financial year at prices prevailing on that day. Thus, the correct profit or loss for this financial year can be ascertained. In the subsequent year, this provision for purchaser are reversed on the first day of the financial year and when the actual purchases are made, the net profit or loss relating to the subsequent financial year is ascertained. Thus, the correct bifurcation of profit/loss between two financial years get ascertained and taxed in respective years.

The provision sought to be disallowed is not appropriation of profit or contingent expenditure or income of the assessee but a liquidated, ascertained and defined liability as creditors for purchases and purchase of stock is reflected in the books of account. This is the basic and fundamental principle of accountancy and only method to ascertain the correct profit or loss for any financial year.

Thus, the query raised by the audit party is based on the wrong understanding of the accounting principles and failure to differentiate between the business expenditure and the personal expenditure. This provision has no personal nature of expenditure. It is pure and simple business expenditure for which liability is booked on provisional value till the actual event get crystallized.

4.8 It is thus clear from this communication that the Assessing Officer himself was convinced that the audit party''s query was raised on wrong understanding of the accounting principles and on failure to differentiate between the business expenditure and the personal expenditure. The Assessing Officer also opined that as far as the personal expenditure was concerned that was pure and simple business expenditure on which liability was booked on provisional value till the actual event get crystallized.

4.9 It is a well laid down principle that the Assessing Officer requires to form his own belief at the time of reopening the assessment and while issuing notice of reopening. However, on having noticed certain aspects from the report of the audit party if the Assessing Officer chooses to form his opinion to reopen validity of reopening of such assessment cannot be challenged on the ground of such reopening of assessment being at the instance of audit party.

4.10. On April 1, 1989, after the Amending Act, 1989, the powers of reopening assessment u/s 147 have been made very wide. What is predominantly questioned in this petition is the absence of exercise of powers given by the statute u/s 147 by the Assessing Officer and his having reopened the assessment despite his own objection. The Assessing Officer needs to have reason to believe that income has escaped assessment for any assessment year. The term "reason to believe" provided in section 147 of the Act would indicate that it is his own subjective satisfaction based on reasonable grounds.

4.11 This court has also examined an identical issue in yet another matter where other judgments of the apex court on the issue are also taken into account. It would be relevant to reproduce some of the relevant paragraphs from the case of Cadila Healthcare Ltd Vs. Asst. Commissioner of Income- Tax(OSD) and 1 , as under (page 396) :

Counsel vehemently contended that the entire issue has cropped up on the insistence of the audit party. He submitted that mere opinion of the audit party cannot form a basis for the Assessing Officer to believe that the income chargeable to tax has escaped assessment. In this regard, counsel relied on the following decisions :

(i) COMMISSIONER OF INCOME TAX Vs. LUCAS T. V. S. LTD., in which the apex court upheld the decision of the High Court in which the High Court had quashed the reopening proceedings wherein apart from the information furnished by the audit party, the income tax Officer had no other information for reopening the assessment.

(ii) Agricultural Produce Market Committee Vs. Income Tax Officer, ; [2013] 355 ITR 384 (Guj) wherein a Division Bench of this court was pleased to quash the notice for reopening where the only basis was the Revenue audit objection as regards the eligibility of the assessee for exemption.

(iii) Adani Exports Vs. Deputy Commissioner of Income Tax, wherein Division Bench of this court held as under (page 230) :

It is true that satisfaction of the Assessing Officer for the purpose of reopening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to be scrutinised. However, it is always open to question the existence of such belief on the ground that what has been stated is not correct state of affairs existing on record. Undoubtedly, in the face of the record, the burden lies, and heavily lies, on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the Assessing Officer did not have any reason to believe or did not hold such belief in good faith or the belief which is projected in papers is not belief held by him in fact, the exercise of authority conferred on such person would be ultra vires the provisions of law and would be abuse of such authority. As the aforesaid decision of the Supreme Court indicates though audit objection may serve as information on the basis of which the income tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the income tax Officer on his own where such information is passed on to him by the audit that income has escaped assessment. In the present case, by scrupulously analysing the audit objection in great detail, the Assessing Officer has demonstrably shown to have held the belief prior to the issuance of notice as well as after the issuance of notice that the original assessment was not erroneous and so far as he was concerned, he did not believe at any time that income has escaped assessment on account of erroneous computation of benefit u/s 80HHC He has been consistent in his submission of his report to the superior officers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances the conclusion is irresistible that the belief that income has escaped assessment was not held at all by the officer having jurisdiction to issue notice and recording under the office note on February 8, 1997, that he has reason to believe is a mere pretence to give validity to the exercise of power. In other words, it was a colourable exercise of jurisdiction by the Assessing Officer by recording reasons for holding a belief which in fact demonstrably he did not held that income of assessee has escaped assessment due to erroneous computation of deduction u/s 80HHC, for the reasons stated by the audit. The reason is not far to seek.

On the other hand, learned counsel, Shri Bhatt, appearing for the Revenue, opposed the petition contending that the petitioner had not made full and true disclosures in the return filed. Relying on the Explanation to section 147, counsel submitted that mere indication that any tax was required to be deducted at source in the return would not absolve the assessee from disclosing other relevant aspects.

Counsel further submitted that the Assessing Officer, on the basis of what is pointed out by the audit party, can still form his own opinion with respect to escapement of income and merely because it was pointed out by the audit party that would not render his opinion invalid or the notice illegal. In this regard, counsel relied on the decision of Commissioner of Income Tax Vs. P.V.S. Beedies Pvt. Ltd., and in the case of Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, .

Having thus heard the learned counsel for the parties, we are not required to go into several contentions put forth by both sides. This is so, because on the available material on record, we are inclined to hold that the Assessing Officer could not have reopened the assessment by issuing the impugned notice.

The petitioner has been contending that the Assessing Officer had no independent reason to hold a belief that income chargeable to tax has escaped assessment. It is only at the insistence of the audit party that he had issued notice for reopening. In the petition, it is averred that "the issue on which the case of the petitioner has been reopened is based on the objection raised by the audit party. It is a matter of record that the audit party had raised an objection in regard to non-deduction of tax u/s 195 of the income tax Act, 1961, in respect of international transactions with associated enterprises in regard to payment for product registration services availed of amounting to Rs. 51,94,204 and based on the same opined that the said expenditure was liable to be disallowed u/s 40(a)(i) of the Act. The petitioner respectfully submits that since this objection had been raised on the basis of the information available on the assessment records of the petitioner''s case for the assessment year 2004-05, it clearly establishes that there was no default on the part of the petitioner in fully and truly disclosing the primary facts.

Since the specific case of the petitioner was that the Assessing Officer had acted at the behest of the audit party and held no independent opinion on its own with respect to the income escaping assessment, we had called for the original records pertaining to the files of the assessee from the Revenue Department. Learned counsel, Shri Bhat, after a detailed search, made available a copy of the letter dated May 21, 2009, from one Ritu Singh Sharma, Assistant Commissioner of income tax, in charge of this case at the relevant time, addressed to the senior audit officer. In the said letter, she has stated that the audit party has observed that for the amount in question TDS was required to be deducted. Thereupon, details were called for. She concluded that looking to the Board''s circular dated August 8, 1995, TDS was not required to be deducted. Taking note of the explanation of the assessee she stated as under :

In view of the above explanation, there was no underassessment in the assessee-company''s case in both the assessment years, i.e., the assessment year 2004-05 and the assessment year 2005-06.

Further, the basic requirement of deducting tax u/s 195 is that whether payment of a sum to a non-resident is chargeable to tax under the provisions of the Act or not. TDS liability u/s 195 arises only when income is credited to account of payee or on actual payment of same.

Therefore, as the abovementioned expenditure is in the nature of reimbursement of expenses no TDS is required to be deducted in view of the Board''s Circular No. 715, dated August 8, 1995.

Under the circumstances, it clearly emerges from the record that the Assessing Officer was of the opinion that no part of the income of the assessee has escaped assessment. In fact, after the audit party brought the relevant aspects to the notice of the Assessing Officer, she held correspondence with the assessee. Taking into account the assessee''s explanation regarding the non-requirement of TDS collection and ultimately accepted the explanation concluding that in view of the Board''s circular, tax was not required to be deducted at source. No income had, therefore, escaped assessment. Despite such opinion of the Assessing Officer, when ultimately the impugned notice came to be issued the only conclusion we can reach is that the Assessing Officer had acted at the behest of and on the insistence of the audit party. It is well settled that it is only the Assessing Officer whose opinion with respect to the income escaping assessment would be relevant for the purpose of reopening of a closed assessment. It is, of course true, as held by the decisions of the apex court in the case of Commissioner of Income Tax Vs. P.V.S. Beedies Pvt. Ltd., and Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , if the audit party brings certain aspects to the notice of the Assessing Officer and, thereupon, the Assessing Officer forms his own belief, it may still be a valid basis for reopening the assessment. However, in the other line of the judgment noted by us, it has clearly been held that a mere opinion of the audit party cannot form the basis for the Assessing Officer to reopen the closed assessment that too beyond the four years from the end of the relevant assessment year.

As is more than apparent, assessment was completed on scrutiny. In the post-assessment period, the audit party raised the objection and the Assessing Officer had strongly objected to such objections by communicating internally as mentioned hereinabove.

In such background, reasons for reopening if are noted, they are almost identically worded as that of audit report. No material worth the name emerges to indicate any independent application of mind. The facts are quite glaring on the contrary and they clearly establish the absence of subjective satisfaction of the Assessing Officer. Thus, the ground raised by the petitioner that such notice of reopening is invalid for the Assessing Officer having not formed his independent belief requires to be sustained.

As regards the other two grounds raised by the petitioner which are also contested heavily, the petitioner sought support from the decision of the apex court in GKN Driveshafts (India) Ltd. Vs. Income Tax Officer and Others, which makes it obligatory on the part of the Assessing Officer to pass a reasoned order on receipt of the objections from the assessee before finalizing the assessment and from Commissioner of Income Tax, Delhi Vs. Kelvinator of India Limited, which does not permit change of opinion of the Assessing Officer at the time of reopening of assessment. These aspects need not be gone into when the challenge of the petitioner on the main ground itself has succeeded effectively. Resultantly, the impugned notice of reopening dated November 21, 2011, needs to be quashed. The petition is allowed and the same stands disposed of in the above terms. No order as to costs.