Siddhi Vinayak Transport vs Assistant Commissioner of Income Tax

Akil Kureshi, J.—Heard learned counsel for the parties for final disposal of the petition. The petitioner has challenged a notice dated August 24, 2012, as at annexure A to the petition, issued by the respondent-Assessing Officer u/s 148 of the income tax Act, 1961 (for short "the Act").

The petition arises in the following factual background:

2.1. The petitioner is a partnership firm. For the assessment year 2008-09, the petitioner filed its return of income on September 26, 2008, declaring a total income of Rs. 7,22,630. Along with the return, the petitioner also filed audited accounts, as statutorily required. Such return of the petitioner was taken in scrutiny by the Assessing Officer, who framed the scrutiny assessment u/s 143(3) of the Act on December 27, 2010.

2.2. During such scrutiny assessment, the Assessing Officer examined the requirement of tax deduction at source on a total labour charge payment of Rs. 16.09 cores (rounded off), on which no tax was so deducted. The Assessing Officer, after putting the petitioner to notice in the order of assessment, disallowed a sum of Rs. 3.21 crores (rounded off), out of the above noted total labour payment charges.

2.3. The order of assessment was carried in appeal by the petitioner. One of the grounds in such appeal was in respect of disallowance of the said sum of Rs. 3.21 crores (rounded off). The Commissioner of income tax (Appeals) passed the appellate order on July 2, 2012, and allowed the assessee''s objection to the disallowance of Rs. 3.21 crores (rounded off) made by the Assessing Officer. It is stated that such order of the Commissioner of income tax (Appeals) is pending before the Tribunal, under an appeal filed by the Revenue.

2.4. On August 24, 2012, the respondent-Assessing Officer issued a notice of reopening the assessment for the said assessment year 2008-09. At the request of the petitioner, he supplied the reasons recorded for issuing of such notice, which reads as under:

Reasons for reopening of assessment u/s 147 of the income tax Act, 1961.

In this case, the assessee-firm engaged in the business of transportation had filed its return for the assessment year 2008-09 on September 26, 2008, declaring an income of Rs. 7,22,630. The case was completed in scrutiny manner u/s 143(3) of the Act on December 27, 2010, by determining the taxable income of Rs. 3,71,93,320. On verification the assessment records revealed that during the scrutiny assessment an amount of Rs. 3,21,84,435 was disallowed u/s 40(a)(ia). It was further noticed that in the scrutiny assessment disallowance of Rs. 3,21,84,435 made was 20 per cent of Rs. 16,09,22,175 on account of freight payment. u/s 40(a)(ia), the whole expenditure was required to be disallowed for failure to deduct tax at source whereas only 20 per cent of the total expenditure on account of freight payment of Rs. 16,09,22,175 was made by the Assessing Officer on lump sum basis. Since no provision for lump sum disallowance of expenditure u/s 40(a)(ia) of the Act was provided, disallowance was required to be made of Rs. 16,09,22,175 or the actual expenditure on which no tax was deducted though required to be deducted as per the provisions of the Act.

Incorrect/short disallowance of expenditure of Rs. 12,87,37,740 (16,09,22,175-3,21,84,435) on account of freight payment resulted in underassessment of income of Rs. 12,87,37,740 with consequent short levy of tax of Rs. 5,81,98,082 as shown below.

In view of the above facts, I have reason to believe that income has escaped assessment up to Rs. 12,87,37,740. Accordingly, the assessment is reopened u/s 147 of the income tax Act, 1961.

2.5. The petitioner thereupon, under its communication dated January 24, 2013, raised several objections to the reopening of assessment. Such objections were, however, rejected by the respondent, by an order dated February 6, 2013. Hence, the petition.

Learned counsel for the petitioner raised the following contentions in support of the prayers:

(i) That the entire issue of non-deduction of tax at source on the total labour payment charges of Rs. 16.09 crores was examined by the Assessing Officer at length in the original order of assessment. He further stated that the extent to which he desired to disallow the expenditure is shown in the assessment order itself. In such order, he Was of the opinion that 20 per cent tax disallowance was justified. Thus, the Assessing Officer, having scrutinised the claim in the order of assessment, any attempt on behalf of the respondent to reopen the assessment on such basis, would be a mere change of opinion.

(ii) The counsel for the petitioner contended that the petitioner had, even to the limited extent of disallowance made by the Assessing Officer, carried the matter in appeal. The Commissioner of income tax (Appeals) had deleted the entire disallowance, after admitting the additional evidence on record by virtue of the third proviso to section 147 of the Act and on the principle of merger, it would be wholly impermissible for the Assessing Officer to re-examine the entire issue when the Commissioner of income tax (Appeals) has already given his opinion.

On the other hand, the learned counsel, Mr. Sudhir Mehta, for the Department opposed the petition contending that since the petitioner did not produce the necessary documents at the time of original assessment, the Assessing Officer made ad hoc disallowance. This, being not an order, notice for reopening came to be issued within a period of four years from the end of the relevant assessment year.

He further contended that before the Commissioner of income tax (Appeals), only the validity of disallowance made by the Assessing Officer was at issue in the appeal filed by the assessee. Whether the entire expenditure could have been disallowed was never at issue before the Commissioner of income tax (Appeals).

Having heard learned counsel for the parties and having perused documents on record, the following aspects mainly emerge:

(a) During the scrutiny assessment, the question of non-deduction of tax at source on labour payment charges of Rs. 16.09 crores came up for consideration before the Assessing Officer. He, in fact, issued a notice to the assessee on November 24, 2010, and stated as under:

Complete details of expenses of Rs. 16,37,42,549, incurred on account of cartage, octroi and labour expenses is not filed till date. Further, part-wise amount paid and TDS details is also not filed. You are requested to file all the details. It will be presumed that TDS is not properly deducted and the amount of Rs. 3,27,48,509 being 20 per cent will be disallowed u/s 40(a)(ia) of the income tax Act.

In the final order of assessment, he devoted several pages to the petitioner''s claim of deduction of labour payment charges. In paragraph 4 of the assessment order, he discussed the disallowance on account of non-deduction of TDS on cartage, labour and octroi expenses. In reply to the notice dated November 24, 2010, the assessee made averments as to why disallowance should not be made relying on the provisions contained in section 194C of the Act. He, ultimately, rejected the assessee''s contentions and concluded as under:

In view of the above, the contention of the assessee has no basis. However, to be reasonable, 20 per cent of the total payment, i.e., Rs. 16,09,22,175 is disallowed u/s 40(a)(ia) of the income tax Act. The disallowance comes to Rs. 3,21,84,435.

(b) It is this claim, which the Assessing Officer now seeks to re-examine by issuance of notice for reopening of the assessment. The reasons recorded by him clearly bring about this aspect.

In the reason, he concluded that the Assessing Officer made disallowance at the rate of 20 per cent However, the entire amount should have been disallowed and, therefore, the disallowance of expenditure required to be made comes to Rs. 12,87,33,740. Therefore, he recorded that he had reason to believe that the income to the above extent chargeable to tax had escaped assessment.

It thus clearly emerges from the record that the Assessing Officer now wishes to re-examine the petitioner''s claim of deduction on the premise that the earlier Assessing Officer made an error in limiting such allowance to 20 per cent of the total expenditure. In his opinion, 100 per cent disallowance was called for. To the extent that the Assessing Officer, in the scrutiny assessment, did not disallow 80 per cent of the expenditure and limited the disallowance to 20 per cent had committed an error.

We are not examining the validity of the contention of the Assessing Officer, recorded in the form of reasons, for issuing the notice. We are limiting our observations to his assuming jurisdiction of reopening of the assessment on such basis. When the earlier Assessing Officer had framed scrutiny assessment and examined certain deductions thoroughly, it was, thereafter, simply not open to the latter Assessing Officer to reopen the assessment on the basis that the earlier Assessing Officer committed a legal error. Once the claim was examined, scrutiny assessment was framed and the Assessing Officer came to the conclusion with or without recording reasons in the assessment order, such an assessment could not have been subjected to the process of reopening. This is not to suggest that the Revenue would be rendered without any remedy even in a case where the Assessing Officer committed a gross error in under assessing an income chargeable to tax.

Section 263 of the Act, of course, when the requirements laid down in the provisions are satisfied, empowers the Commissioner to take such an order in revision. However, the succeeding Assessing Officer cannot doubt the legality of a conclusion recorded by the earlier Assessing Officer in his assessment order, which was framed after scrutiny. In a some what similar circumstance, we had in our judgment dated April 16, 2013, passed in S.C.A. No. 357 of 2013 in the case of Transwind Infrastructure (P) Ltd. Vs. Income Tax Officer, made following observations (page 70):

From the above, it can be seen that the Assessing Officer was acutely conscious about the petitioner not having deducted tax on labour payment charges of Rs. 3.05 crores and the petitioner''s contention that it was so done because the provision for TDS was not applicable. He was not convinced by such explanation. He, however, for some strange reasons did not apply the provision of section 40(a)(ia) of the Act instead made ad hoc disallowance of Rs. 25,60,000 at eight per cent of the total labour payment charges.

Whatever be the legality of such assessment, the fact remains that, in the scrutiny assessment, the Assessing Officer had thoroughly and fully scrutinised the assessee''s claim of deduction of labour expenditure. To the extent he was inclined to disallow the same, he did so. By no stretch of imagination it can be stated that the issue was not at large before the Assessing Officer in the original scrutiny assessment. Any re-examination of such a question at this stage would only amount to change of opinion. Remedy of reopening the assessment, therefore, was simply not available. In the decision of the Supreme Court in the case of Commissioner of Income Tax, Delhi Vs. Kelvinator of India Limited, the apex court observed as under (page 564):

On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from April 1, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-conditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check the abuse of power by the Assessing Officer. Hence, after April 1, 1989, the Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer.

If the Revenue was of the opinion that the Assessing Officer erroneously and to the prejudice of the interests of the Revenue allowed certain claim, in a given situation, it would have been open for the appropriate authority to exercise revisional powers. However, once the claim was fully examined, power of reopening was simply not available.

Such observations would apply in the present case also. We make it clear that it is not a case where the Assessing Officer, while framing original scrutiny assessment, did not examine the petitioner''s claim of deduction. He was acutely conscious of such a claim and was also of the opinion that the entire claim was not required to be granted. He called for explanation of the assessee and after taking into consideration the explanation, made disallowance to the extent he was convinced to do. If, in the process, he made a legal error, the succeeding Assessing Officer cannot correct such an error, through the process of reopening of the assessment. This is precisely, in the present case, what the respondent seeks to achieve. His reasons recorded clearly reflect such a state of affairs. He expresses his opinion that the disallowance which was limited to 20 per cent: of the expenditure was not justified in law and the entire expenditure should have been disallowed. We are afraid, this Cannot be the basis for reopening of the assessment previously framed after scrutiny.

In view of the above conclusion, we are inclined to quash the impugned notice dated August 24, 2012. The question whether on the additional ground of merger, as flowing through the proviso to section 147 of the Act, the notice is bad in law, we have not gone into in this case. Subject to the above observations, the petition is allowed. The impugned notice dated August 24, 2012, is quashed.