AI Structured Summary
Not yet generated for this judgment
Judgment
Honourable Mr. Justice Akil Kureshi
Rule. Mrs. Mauna Bhatt, waives service of rule on behalf of the respondents.
The petitioner has challenged the notice dated 30.3.2011 annexed at Annexure-A to the petition in following factual background:-
2.1 The petitioner is a Private Limited Company and is engaged in the business of construction and execution of works on contract basis. The contracts that the petitioner enters into with various parties carry a defect liability clause usually for a period of one year of the completion of the work. It is the case of the petitioner that in the meantime, the petitioner receives interim payments from the contractee, which payments are made after deducting the retention money from the estimated value of the work completed. It is also the case of the petitioner that payment of retention money withheld by the contractee is, upon satisfactory completion of the work and expiry of the defect liability period is released. It is, therefore, the case of the petitioner that the right to receive the retention money does not accrue in the interim period. The petitioner, therefore, does not account for such retention money as its receipt in its accounting system. It is also the case of the petitioner that company is in the business of construction since the year 1982 and has been consistently following the same system year after year.
2.2 For the assessment year 2006-07, the petitioner company filed return of income on 17.11.2006 declaring total income of Rs.28.73 lakhs (rounded off). Such return was taken in scrutiny by the Assessing Officer. After queries and correspondence between two sides, the Assessing Officer framed assessment order u/s 143(3) of the Act on 21.11.2008 determining the total income of the assessee at Rs.36.12 lakhs (rounded off).
Aggrieved by certain additions, the petitioner preferred appeal before Commissioner against such order of assessment. Such appeal is still pending. At that stage, the Assessing Officer issued impugned notice dated 30.3.2011, stating that he has reason to believe that income chargeable to tax has escaped assessment for the assessment year 2006-07. He, therefore, called upon the assessee to file return of income within 30 days from the receipt of notice.
At the request of the petitioner the Assessing Officer supplied the reasons he had recorded for reopening the assessment. Such reasons read as under:-
The reasons recorded for re-opening assessment u/s 147 for AY 2006-07 is as under:
The assessee company had filed return on 17/11/2006 showing total income at Rs.28,73,365/-. The assessment u/s.143(3) was finalized on 21/11/2008,determining total income at Rs.36,12,630/-.
It is seen that, Scrutiny of records revealed that as per scheduleB(Significant accounting policies and notes on accounts), "Contracts receipts are accounted ( net of scrutiny deposits/ Retention money)". Further as per letter dated 20-11-2008 assessee company as deducted Retention money of Rs.41,53,281/- from the profit of the company during the year. The Retention money was to be offered for taxation in the year in which bills are raised.
Thus by deducing Retention money irregularly from the current year profit resulted in underassessment of income of Rs.41,53,281/-.
The petitioner raised objection to the proposal for reopening the assessment vide communication dated 23.6.2011. Such objections, however, were disposed of and declined by the Assessing Officer vide his communication dated 27.6.2011. At that stage, the petitioner has approached this Court and challenged the notice for reopening the assessment.
From the reasons recorded, it can be seen that the ground on which the Assessing Officer has formed a belief that income chargeable to tax has escaped assessment, is that according to him the retention money was required to be offered to tax in the year under consideration, because the same had to be taxed in the year in which the bills were raised.
Counsel for the petitioner, taking us through the documents on record, contended that during the original assessment, which was framed after scrutiny, detailed questionnaire was raised by the Assessing officer, particularly, with respect to discrepancies between the tax deducted at source and the income and the receipts shown in the accounts of the assessee pertaining to such TDS. The assessee had pointed out that the mismatch was on account of the retention money which the assessee had offered for tax only upon completion of the liability period. Counsel further pointed out that the Assessing Officer also raised queries with respect to drop in GP ratio. In this context also the assessee had highlighted that the gross profit should be seen from the point of view of the retention money and any other method would give a distorted picture. It was only thereafter that the Assessing Officer made certain additions but did not interfere with this method of accounting adopted by the petitioner. In short, the contention of the petitioner''s counsel was that the issue was discussed threadbare by the Assessing Officer, while framing the original assessment. Now to reconsider the issue would only amount to change of opinion.
Counsel further submitted that at the hands of the assessee, the assessment order originally framed is in appeal before Commissioner (Appeals). On the principle of merger, it now would not be open for the Assessing Officer to reopen the assessment on this issue.
Counsel lastly submitted that in any case taxability of the retention money in the year in which bills were raised has been finally concluded by this Court in the case of this very assessee pertaining to earlier assessment years.
On the other hand learned Senior Advocate Mr.M.R. Bhatt for the Revenue opposed the petition contending that in the original assessment the treatment of retention money was not at issue. The Assessing Officer, therefore, had formed no opinion. Notice which is issued within 4 years from the end of the relevant assessment year, therefore, was valid. Counsel further submitted that before the Commissioner (Appeals) the treatment to the retention money is not at issue and principle of merger would not apply. Counsel lastly submitted that the in the earlier years, question of taxability of the retention money was not at large.
Having heard learned counsel for the parties and having perused the documents on record, we are not inclined to go into the first two contentions raised by the counsel for the petitioner namely whether on facts of case, the Assessing Officer can be stated to have formed any opinion on the taxability of the retention money and whether merely because the assessee has challenged the Assessing Officer''s order before the Commissioner on some other grounds, reopening of assessment would not be permissible on principle of merger; since in the facts of the present case, these issues need not be deliberated upon. This is so because in our opinion the entire issue on merits has been decided in favour of the assessee right upto the High Court level.
We have briefly noted the central controversy on the basis of which the Assessing Officer seeks to reopen the assessment. The assessee, while executing the works contracts, raises its bills, receives periodical payments from the clients, which payment are made after retaining the part of the bills raised towards retention money. This is pursuant to the agreement between the parties that the retention money would be released upon expiry of a certain period after completion of the work. As per the assessee, though the bills are raised, right to receive such retention money is not accrued and the assessee, therefore, does not reflect the entire amount of the bills raised in its accounts, though the assessee follows the mercantile system of accounting. The Assessing Officer, however, holds the prima facie belief that the retention money also should have formed part of the assessee''s receipts for the year under consideration.
This very issue had cropped up between the assessee and the department in the earlier years as it can be seen from the orders of CIT(Appeals) as well as the Tribunal produced by the petitioner on record for the assessment year 1995-96. CIT(Appeals) had disposed of the assessee''s appeal by an order dated 24.11.1999. Sole ground decided by CIT(Appeals) in the said order was with respect to an amount of Rs.11.96 lakhs, which represented retention money. During the assessment proceedings, while reconciling the gross receipts as per the TDS certificates and that disclosed by the assessee in the Profit and Loss account, the Assessing Officer noticed a discrepancy between the two. Upon detailed reconciliation provided by the assessee, it was revealed that the sum of Rs.11.96 lakhs represented the retention money withheld by the clients, though the work was done. The Assessing Officer enquired with the assessee that why such retention money should not be treated as the assessee''s income. The assessee contended that the retention money as per the terms of the contract was contingent upon completion of the work and the same was not due and payable to the assessee. The Assessing Officer did not accept assessee''s claim holding that since the assessee was following mercantile system of accounting the accrual of income was independent of its receipt. In appeal before the Commissioner, the assessee contended that this uniform pattern has been followed year after year and in all previous years, the stand of the assessee has been accepted. The Appellate Commissioner deleted the addition relying on the decision of the Tribunal. Revenue had carried the order of CIT(Appeals) before the Tribunal. The Tribunal by its judgment dated 27.6.2008 dismissed the Revenue''s appeal. Such decision of the Tribunal was carried further in appeal before this Court in Tax Appeal No.163 of 2009, which was dismissed by order dated 3.5.2011.
In the result, it would emerge that the central issue on which the Assessing Officer seeks to reopen the assessment previously framed after scrutiny, has been held in favour of the assessee. In that view of the matter, we do not find that the notice can be sustained in law and the same is, therefore, quashed. Petition is disposed of accordingly. Rule is made absolute accordingly.