Smt. Madhuri Ghosh vs Union of India and Others

Indira Banerjee, J.—In these writ petitions the petitioner has interalia challenged notices of reassessment issued to the petitioner u/s 148 of the Income Tax Act, 1961, hereinafter referred to as the ''IT Act'', for the assessment years 1999-2000 to 2005-2006. The issues involved in all the writ petitions being more or less similar, the writ petitions were heard together, and are being disposed of by this common judgment and order.

The petitioner is the owner of house properties at 50, Chowringhee Road, Kolkata and 13, Park Street, Kolkata, which are hereinafter referred to as ''the Chowringhee Property'' and ''the Park Street Property'' respectively.

Both the Chowringhee property and the Park Street property yield rental income and as such the petitioner is assessed to Income Tax, her Permanent Account Number being ADNPG2470J.

The petitioner filed her Income Tax Returns for the Assessment Years 1999-2000 to 2004-2005 before the Assessing Officer Ward No. 16(1) on diverse dates. The returns were duly processed and orders of assessment were passed u/s 143(1) of the IT Act accepting the income as declared by the petitioner.

Subsequently, however, reassessment proceedings u/s 147 of the IT Act were initiated, which have given rise to these writ petitions, as per the details given below:-

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The petitioner also filed her returns for the Assessment Year 2005-2006. Before any order of assessment was passed u/s 143, proceedings u/s 147 of the IT Act were initiated by issuance of notice u/s 148. The notice u/s 148 is under challenge in W.P. No. 17173 (W) of 2006.

In computing income from the Park Street property and the Chowringhee property under the head of ''Income from House Property'' the petitioner deducted expenses incurred on account of service and other incidental charges such as expenses incurred for payment of sweepers, watchmen, plumbers, electricians etc. The statutory deduction u/s 24 of the IT Act was computed on the basis of the net income after deduction of the said incidental charges.

As observed above, the returns filed by the petitioner on the aforesaid basis for the assessment years 1999-2000 to 2004-2005 were accepted, and orders of assessment were made u/s 143(1) of the Income Tax Act. However, notices were issued for all those years as well as the Assessment Year 20052006, u/s 148 of the Income Tax Act for reassessment/assessment u/s 147 of the said Act.

From the reasons disclosed for reopening of assessment u/s 147, it appears that the notices were issued on the ground that there was no provision for deduction of incidental charges and service charges and that the petitioner was only entitled to statutory deduction in terms of Section 24 of the IT Act.

Orders of reassessment u/s 147 of the IT Act were passed on 10th March, 2005 for the Assessment Years 1999-2000 to 2002-2003, disallowing deduction of services charges and other incidental charges. Similar orders of reassessment disallowing deduction of services charges and other incidental charges were passed on 17th December, 2007, in respect of the Assessment Years 2003-2004 and 2005-2006.

Mr. J.P. Khaitan, Advocate appearing on behalf of the petitioner submitted, and rightly, that upon disallowance of deduction of expenses claimed by the petitioner, the income increased. The statutory deduction allowable u/s 24 of the IT Act, would also be higher, as the statutory deduction is 30% of the total rent income. If the total rent income was assessed at a higher amount, the statutory deduction would also be correspondingly higher.

Mr. Khaitan submitted that in the reassessment orders for the Assessment Years 1999-2000 to 2002-2003, the Assessing Officer left the statutory deduction claimed by the petitioner in her returns undisturbed. The Assessing Officer also doubted the correctness of the incidental charges and service charges claimed by the petitioner, observing that the claims were not substantiated by cogent documents, even though the claims were earlier accepted on the basis of the same documents and orders of assessment were passed. There appears to have been a mere change of opinion with regard to the correctness of the amounts claimed as expenses, that is not based on any new materials.

The Assessing Officer initiated proceedings for imposition of penalty u/s 271(1)(c) of the Income Tax Act for the Assessment Years 1999-2000 to 2002-2003 and passed orders imposing penalty on 12th July, 2005. The petitioner filed revisional applications before the Commissioner of Income Tax u/s 264 in respect of the assessment orders, which were rejected by orders dated 16th January, 2006.

In case of the Assessment Years 2003-2004 and 2004-2005 there were no orders of reassessment till 19th December, 2007. The writ petition Nos. 17172 (w) of 2006 and 17165 (w) of 2006 were filed challenging the notices u/s 148. However, since there was no interim order, the Assessing Officer proceeded with reassessment and orders of reassessment were passed on 17th December, 2007. Appeals against the said orders of reassessment were rejected by the Commissioner.

In view of the subsequent developments leave was sought to file supplementary affidavits and the writ applications were reheard, after recalling the orders of this Court, whereby the writ applications had been reserved for judgement.

Mr. Khaitan pointed out that in the reassessment orders passed for the Assessment Years 2003-2004 and 2004-2005, the Assessing Officer re-determined the statutory deduction u/s 24 after taking into account the increase in total income by reason of disallowance of service and other incidental charges. The Assessing Officer also did not initiate any penalty proceedings u/s 271(1)(c) of the Income Tax Act for the assessment years 2003-2004 and 2004-2005.

Mr. Khaitan in his usual fairness submitted that the Assessing Officer''s action in assessing and/or reassessing income for the Assessment Years 2003-2004 and 2004-2005 after disallowing service and other incidental charges and re-computing the statutory deduction u/s 24 for the said years being in accordance with law, the petitioner would not press the challenge to the impugned notices. The Assessing Officer has not initiated any penalty proceedings u/s 271(1)(c) of the Income Tax Act for those years.

Mr. Khaitan submitted, and rightly, that the Assessing Officer should have adopted the same course of action for the Assessment Years 1999-2000 to 2002-2003 as he did for the assessment years 2003-2004 and 2004-2005. The Assessing Officer should have re-determined the statutory deduction u/s 24 on the basis of the total assessed income consequential to disallowance of incidental charges and service charges.

Furthermore no penalty could have been imposed on the petitioners. In Commissioner of Income Tax, Ahmedabad Vs. Reliance Petroproducts Pvt. Ltd., cited by Mr. Khaitan, the Supreme Court held that the making of an incorrect claim in law cannot result in penalty u/s 271(1)(c). The Supreme Court further held as follows:-

It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty u/s 271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty u/s 271(1)(c). That is clearly not the intendment of the Legislature.

In this case, the petitioner was entitled to statutory deduction u/s 24 in accordance with this statute, irrespective of the actual expenditure incurred. For claiming statutory deduction, the petitioner was not required to submit any proof of expenditure.

The observations of the Assessing Officer in the reassessment orders for the assessment years 1999-2000 to 2002-2003, doubting whether the service and other incidental charges in respect of which deductions were claimed had, in fact, been incurred, were wholly irrelevant since statutory deduction u/s 24 is liable to be allowed irrespective of the actual expenditure.

In any case, at the time of initial assessment u/s 143(1), the Assessing Officer had upon scrutiny of relevant documents accepted the claim of the petitioner to service and other incidental charges as genuine. In the absence of any new cogent materials showing that expenses claimed to have been incurred towards service and other charges were inflated by the petitioner, the factual findings of the Assessing Officer could not have been disturbed. Change of opinion cannot be reason for imposition of penalty. It is thus clear that the conditions precedent for initiation of penalty proceedings u/s 271(1)(c) for the Assessment Years 1999-2000 to 2002-2003 were absent.

In respect of the Assessment Year 2005-2006 the Assessing Officer passed an order u/s 143(3) on 17th December, 2007, without any reference to the notice dated 2nd May, 2006 u/s 148 of the Income Tax Act, which was under challenge in the writ petition No. 17165 (w) of 2006. However, in the order u/s 143 (3) for the Assessment Year 2005-2006, the Assessing Officer computed the statutory deduction on the basis of the total income, as reassessed, after disallowance of service and other incidental charges.

The petitioner filed an appeal against the order of assessment before the Commissioner of Income Tax (Appeals), interalia, contending that the order dated 17th December, 2007 u/s 143(3) was without jurisdiction, since proceedings had already been initiated u/s 147 by issuance of notice dated 2nd May, 2006. On the contention that the question raised by the petitioner was not decided by the Commissioner of Appeals, the petitioner filed Writ Petition No. 13555 (w) of 2010 challenging the legality and/or validity of the assessment order dated 17th December, 2007 and the Appellate Order dated 31st August, 2009 as also the order dated 20th May, 2010 imposing penalty u/s 271(1)(c). The writ petition was however disposed of with liberty to the petitioner to appeal to the Income Tax Appellate Tribunal and urge all points before the Tribunal. The petitioner has preferred an appeal before the Tribunal which is pending.

This Court is of the view that the Assessing Officer has, by making an assessment u/s 143(3), given a go by to the notice u/s 148 of the Act. In course of hearing, a certified copy of the order-sheets containing the reasons recorded for initiation of proceedings u/s 147 of the Act for the Assessment Year 2005-2006, allegedly received by the petitioner on 17th May, 2012, was produced. There is a noting dated 25th July, 2006 to the effect that since the return for the assessment year 2005-2006 had been selected for scrutiny on 25th July, 2006, under the scrutiny selection scheme, the proceedings u/s 148 of the Act were being dropped and notices u/s 143 (2) were being issued separately. The proceedings before the Tribunal are, therefore, infructuous. In course of hearing before the Court in 2006 the attention of this court was not drawn to the fact that the proceedings u/s 148 had been dropped. However, it is not for this Court to go into the question of whether the noting is as after thought incorporated subsequently. The petitioners are willing to accept the assessment, provided no further proceedings are initiated.

The orders of reassessment for the Assessment Years 1999-2000 to 2002-2003 are set aside only to the extent of computation of statutory deduction u/s 24 made in the said orders of reassessment. The taxable income of the petitioners for those Assessment Years shall be reassessed, computing the statutory deduction on the basis of the total income as reassessed. The petitioner shall pay the Income Tax as reassessed for the years 2003-2004, 2004-2005 and as assessed for the year 2005-2006 alongwith interest. Needless to mention that the petitioner shall be given credit for the tax already paid for any of the years in question. If any amount is refundable to the petitioner the same shall be refunded expeditiously along with interest, preferably within two months from date. No penalty shall, however, be imposed. All penalty proceedings and penalty orders are set aside. Photostat certified copy of this judgment, if applied for, be supplied to the parties expeditiously, subject to compliance with the requisite formalities.