KAKARIA HOUSING AND INFRASTRUCTURE LTD V. DY. COMMISSIONER OF INCOME TAX

SCA/16767/2018

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Kakaria Housing and Infrastructure Ltd. challenged a notice issued by the Deputy Commissioner of Income Tax under section 148 of the Income Tax Act, 1961, seeking to reopen their assessment for the year 2012-13. The petitioner argued that all relevant facts were disclosed during the original assessment and that the reopening was based on a change of opinion rather than new material facts. The court examined the reasons for reopening and found that the issues had been previously considered and accepted during the original assessment. The court also noted that the reopening was influenced by audit objections rather than an independent belief of the Assessing Officer, leading to the conclusion that the reopening was invalid.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 750602 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 07-10-2019
• Assessment Year: misc
• Other Referred Cases: Income Tax Officer, Ward No.16(2) v. TechSpan India (P.) Ltd., Adani Exports v. Deputy Commissioner of Income Tax (Assessments), Cliantha Research Ltd. v. Deputy Commissioner of Income-tax, Ahmedabad Circle-1, Indian and Eastern Newspaper Society v. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: KALPANA RAVAL
• Assessee Lawyers: HARDIK VORA
• Keywords: Audit objection; Book profit; Capital Gain; Income tax reassessment; Provision for Future Development Expense
• Section: 148; 143(3); 14A; 115JB; 28(iv)

Judgement Text

"C/SCA/16767/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 16767 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MS. JUSTICE SANGEETA K. VISHEN ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== KAKARIA HOUSING AND INFRASTRUCTURE LTD Versus DY. COMMISSIONER OF INCOME TAX ========================================================== Appearance: MR. HARDIK V VORA(7123) for the Petitioner(s) No. 1 MRS KALPANAK RAVAL(1046) for the Respondent(s) No. 1 ========================================================== CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MS. JUSTICE SANGEETA K. VISHEN Date : 07/10/2019 ORAL JUDGMENT (PER : HONOURABLE MS.JUSTICE HARSHA DEVANI) Page 1 of 21 C/SCA/16767/2018 JUDGMENT 1. Rule. Mrs. Kalpana Raval, learned senior standing counsel, waives service of notice of rule on behalf of the respondent. 2. Having regard to the controversy involved in the present case, which lies in a very narrow compass, the matter was taken up for final hearing today. 3. By this petition under article 226 of the Constitution of India, the petitioner has challenged the notice dated 23.03.2018 issued by the respondent under section 148 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) seeking to reopen the assessment of the petitioner for the assessment year 2012­13. 4. The petitioner is engaged in the business of real estate development and is also a partner in M/s. Sai Royal Properties, which is engaged in the same business. The petitioner filed its return of income for assessment year 2012­13 declaring total income at Rs.3,17,74,860/­ on 27.09.2012. The case was selected for scrutiny, whereafter, by an order dated 19.01.2015, assessment came to be framed under section 143(3) of Act assessing the income of the petitioner at Rs.3,19,11,584/­ after making an addition of Rs.1,36,725/­ under section 14A of the Act. 5. Thereafter, by the impugned notice dated Page 2 of 21 C/SCA/16767/2018 JUDGMENT 23.03.2018, the respondent seeks to reopen the assessment of the petitioner for assessment year 2012­13. By a letter dated 12.04.2018, the petitioner requested the respondent to accept the original return of income filed on 27.09.2012, as the return filed in response to the notice under section 148 of the Act. The petitioner electronically filed its return of income on 20.04.2018. The petitioner also requested the respondent to furnish the reasons recorded for reopening the assessment. It appears that in the meanwhile the petitioner had also made an application under the Right to Information Act, pursuant to which the Office of the Principal Director of Audit had given a detailed reply. A copy of the reasons recorded were furnished to the petitioner along with a letter dated 23.07.2018. The petitioner raised objections to the reopening of assessment with detailed submissions, which came to be rejected by an order dated 16.10.2018. 6. Mr. Hardik Vora, learned advocate for the petitioner, submitted that in this case, the impugned notice dated 23.03.2018 has been issued in relation to the assessment year 2012­13, which is clearly beyond a period of four years from the end of relevant assessment year. Therefore, for the purpose of assuming jurisdiction under section 147 of the Act, there has to be failure on the part of the petitioner to disclose fully Page 3 of 21 C/SCA/16767/2018 JUDGMENT and truly all material facts necessary for its assessment for the assessment year under consideration. It was submitted that in the present case, all the facts relevant for assessment were duly placed before the Assessing Officer at the time of scrutiny assessment and hence, in the absence of any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the year under consideration, the assumption of jurisdiction on the part of the Assessing Officer is without authority of law. 6.1 The attention of the court was invited to the reasons recorded for reopening the assessment, to submit that the Assessing Officer seeks to reopen the assessment on two grounds, firstly, in relation to an amount of Rs.2,47,62,500/­ shown by the petitioner in its return of income as capital gain on the ground that the same should have been assessed as income of the petitioner under section 28(iv) of the Act; and secondly, that the petitioner had created a provision for future development expense of Rs.3,59,48,400/­ and had debited the same under the head “cost of materials”, which was created on estimation basis and hence, this was a provision which was required to be added to the net profit for computing book profit as per the provisions of section 115JB of the Act. Page 4 of 21 C/SCA/16767/2018 JUDGMENT 6.2 Reference was made to the notice dated 19.11.2014 issued by the Assessing Officer under section 142(1) of the Act during the course of scrutiny assessment, to point out that he had specifically called upon the petitioner to state as to why the provision for future development expenses of Rs.2,51,86,534/­ have been debited to the profit and loss account, but have not been added back in the computation of income and that the provision is not an expense incurred for the purpose of business and is un­ascertainable in nature. The petitioner was, accordingly, called upon to explain as to why such amount should not be added back to the return of income. It was pointed out that the petitioner was also called upon to explain as to why the gain on retirement from M/s. Sai Royal Properties should not be treated as business income given the fact that M/s. Sai Royal Properties was also engaged in the business as that of the petitioner and was essentially, an extension of the petitioner. 6.3 It was pointed out that in response to the notice under section 142(1) of the Act, the petitioner had given a detailed reply explaining the two issues raised by the Assessing Officer. It was submitted that the Assessing Officer, after being convinced with the explanation given by the petitioner, framed assessment under section 143(3) of the Act, without making any addition in respect of these two issues. It was Page 5 of 21 C/SCA/16767/2018 JUDGMENT submitted that therefore, during the course of scrutiny assessment, the Assessing Officer had duly applied his mind to both the issues on which the assessment is sought to be reopened and hence, the reopening is based on a mere change of opinion and therefore also, the assumption of jurisdiction on the part of the Assessing Officer lacks validity. 6.4 In support of his submissions, the learned advocate placed reliance upon the decision of the Supreme Court in the case of Income Tax Officer, Ward No.16(2) v. TechSpan India (P.) Ltd., (2018) 92 taxmann.com 361 (SC), wherein the court held thus: “13. The fact in controversy in this case is with regard to the deduction under Section 10A of the IT Act which was allegedly allowed in excess. The show cause notice dated 10.02.2005 reflects the ground for re­ assessment in the present case, that is, the deduction allowed in excess under Section 10A and, therefore, the income has escaped assessment to the tune of Rs. 57,36,811. In the order in question dated 17.08.2005, the reason purportedly given for rejecting the objections was that the assessee was not maintaining any separate books of accounts for the two categories, i.e., software development and human resource development, on which it has declared income separately. However, a bare perusal of notice dated 09.03.2004 which was issued in the original assessment proceedings under Section 143 makes it clear that the point on which the re­assessment proceedings were initiated, Page 6 of 21 C/SCA/16767/2018 JUDGMENT was well considered in the original proceedings. In fact, the very basis of issuing the show cause notice dated 09.03.2004 was that the assessee was not maintaining any separate books of account for the said two categories and the details tiled do not reveal proportional allocation of common expenses be made to these categories. Even the said show cause notice suggested how proportional allocation should be done. All these things leads to an unavoidable conclusion that the question as to how and to what extent deduction should be allowed under Section 10A of the IT Act was well considered in the original assessment proceedings itself. Hence, initiation of the re­assessment proceedings under Section 147 by issuing a notice under Section 148 merely because of the fact that now the Assessing Officer is of the view that the deduction under Section 10A was allowed in excess, was based on nothing but a change of opinion on the same facts and circumstances which were already in his knowledge even during the original assessment proceedings.” 6.5 Lastly, it was pointed out that pursuant to the application made by the petitioner under the Right to Information Act, 2005 the audit paras have been furnished to the petitioner. The attention of the court was invited to the audit paras to point out that both the issues, on which the Assessing Officer seeks to reopen the assessment, are based upon the objections raised by the audit department. Referring to the audit paras, it was pointed out that in response to both the issues, the Assessing Officer did not Page 7 of 21 C/SCA/16767/2018 JUDGMENT accept the objections and gave his reply thereto. However, the audit department did not accept the reply of the Assessing Officer. It was submitted that therefore, the formation of belief that income chargeable to tax has escaped assessment is not that of the Assessing Officer, but of the audit department and hence also, the reopening of assessment is bad. 6.6 To bolster his submission, learned advocate placed reliance upon the decision of this court in the case of Adani Exports v. Deputy Commissioner of Income Tax (Assessments), (1999) 240 ITR 224, wherein it has been held thus: “It is true that satisfaction of the Assessing Officer for the purpose of re­ opening 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 scrutinized. However, it is always open to question the existence of such belief on the ground that what has been stated is not the 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 Page 8 of 21 C/SCA/16767/2018 JUDGMENT conferred on such person would be ultra vires the provisions of law and would be an 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 Income­tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the Income­tax 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 under section 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 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 Page 9 of 21 C/SCA/16767/2018 JUDGMENT demonstrably he did not hold that income of the assessee has escaped assessment due to erroneous computation of deduction under section 80HHC, for the reasons stated by the audit. The reason is not far to seek.” 6.7 Reliance was also placed upon the decision of this court in the case of Adani Infrastructure & Development (P.) Ltd. v. Assistant Commissioner of Income Tax, (2019) 101 taxmann.com 256 (Gujarat), wherein the court has recorded that in the facts of the said case, the record clearly revealed that the Assessing Officer had not accepted the objections raised by the audit party and on the contrary, had objected to such objections by communicating internally. Evidently, therefore, the Assessing Officer had not formed any independent belief that income chargeable to tax had escaped assessment. 6.8 Reliance was also placed upon the decision of this court in the case of Cliantha Research Ltd. v. Deputy Commissioner of Income­tax, Ahmedabad Circle­1, (2013) 35 taxmann.com 61 (Gujarat), wherein it has been held that when during the original assessment the assessee’s claim was processed at length and after calling for detailed explanation the same was accepted, merely because a certain element or angle was not in the mind of the Assessing Officer while accepting such a claim, it cannot be a ground for issuing notice under section 148 for reassessment. Page 10 of 21 C/SCA/16767/2018 JUDGMENT 6.9 It was, accordingly, urged that the petition deserves to be allowed by setting aside the impugned notice issued under section 148 of the Act as well as all proceedings taken pursuant thereto. 7. Opposing the petition, Mr. Nikunt Raval learned advocate for Mrs. Kalpana Raval, learned senior standing counsel for the respondent, submitted that insofar as the addition of the provision for future development expenses to the net profit for computing book profit under section 115JB of the Act is concerned, the said amount was created on estimation basis, which was never disclosed at the time of the scrutiny assessment proceedings. The then Assessing Officer had discussed about the allowability of such claim as business expense, as the provision was not an expense for the purpose of business. It was submitted that the issue of allowability of such unascertainable expense while calculating book profit under section 115JB of the Act was never discussed during the original assessment proceedings and therefore, it cannot be said that the Assessing Officer had formed an opinion on this issue. Under the circumstances, it cannot be said that the reopening is based upon a mere change of opinion. 7.1 As regards the contention raised by the Page 11 of 21 C/SCA/16767/2018 JUDGMENT learned advocate for the petitioner that the reopening of assessment is based upon an audit objection, it was submitted that there is no mention of any audit objection in the reasons recorded for reopening the assessment. Therefore, the question of borrowed satisfaction on the part of the Assessing Officer while reopening the assessment would not arise. It was submitted that the Assessing Officer, after duly applying his mind to the facts of the case and forming the requisite belief that income chargeable to tax has escaped assessment, has assumed jurisdiction under section 147 of the Act and that there being no infirmity in the action of the respondent, there is no warrant for interference by this court. 8. This court has considered the submissions advanced by the learned advocates for the respective parties. As can be seen from the reasons recorded, the Assessing Officer seeks to reopen the assessment on the following two grounds, which are extracted for ready reference: “(i) The assessee company was a partner in M/s. Sai Royal Properties having 50% share as partner. This share of capital was accounted by the assessee company under the head “Investments”. On retirement from the partnership firm, M/s Sai Royal Properties, the assessee had received Rs.2,47,62,500/­ from M/s. Sai Royal Properties in addition to its capital balance of Rs.3,98,65,000/­. It had shown the amount of Rs.2,47,62 500 in Page 12 of 21 C/SCA/16767/2018 JUDGMENT its Return of Income as Capital Gain, as the character of the investment is “Capital” in nature. However, on perusal of para 21 regarding “Settlement of account and Goodwill”, of the Partnership deed of M/s. Sai Royal Properties Dt. 02/07/2007, it is noticed that there it was specifically mentioned that the retiring partner would not be entitled to receive any amount as Goodwill or otherwise beyond the balance standing to the credit of such party capital account in the books of the firm after adjusting the share of profit and loss upto the date of retirement. Hence, the amount of Rs.2,47,62,5OO/­ received by the assessee should have been treated as income of the assessee u/s. 28(iv) of the I.T. Act. (ii) The assessee company was engaged in the business of real estate deve1opment i.e. developing the property into sub plots. For arriving at correct profit, every year the assessee estimated the cost required to be incurred to meet the promises made to the buyers of the plots and if required revised the estimates made earlier. For this, the assessee had created a provision for future development expense of Rs.3,59,48,400/­ and debited the same under the head cost of materials. However, the same was created on an estimation basis, the liability for which was not ascertained during the year. As this was a provision, it was required to be added to the net profit for computing book profit as per the provisions of Section 115JB. As per the provision of section 115JB of the I.T. Act, prof1t as per P&L is to be increased by the amount set aside to provide for meeting liabilities, other than ascertained liabilities. Hence, Rs.3,59,48,400/­ was required to be added to the net prof1t for computing Book Profit under section 115JB.” Page 13 of 21 C/SCA/16767/2018 JUDGMENT 9. Thus, it is on the above referred two grounds that the Assessing Officer seeks to reopen the assessment of the petitioner for the assessment year under consideration. Since it has been contended on behalf of the petitioner that the reopening is based upon a mere change of opinion, it would be necessary to examine as to whether the Assessing Officer, at the time of scrutiny assessment, has applied his mind to the said issues. In this regard, a perusal of the notice dated 19.11.2014 issued under section 142(1) of the Act reveals that the Assessing Officer had specifically stated that the provision for future development expenses of Rs.2,51,86,534/­ have been debited to the Profit and Loss Account, but have not been added back to the computation of income; and that the provision is not an expense incurred for the purpose of business and is unascertainable in nature. He had, accordingly, called upon the petitioner to explain as to why the said amount should not be added back to the returned income. The Assessing Officer had further called upon the petitioner to explain as to why the gain on retirement from firm M/s. Sai Royal should not be treated as business income, given the fact that M/s. Sai Royal is engaged in the same business and is essentially an extension of the petitioner. Page 14 of 21 C/SCA/16767/2018 JUDGMENT 10. Thus, though not stated in exactly the same terms, the Assessing Officer did call for an explanation from the petitioner in respect of both the items on which the respondent seeks to reopen the assessment. Furthermore, in response to the notice issued by the Assessing Officer under section 142(1) of the Act, the petitioner had given its explanation by a communication which was received by the Assessing Officer on 04.12.2014, wherein both the issues have been explained at length. The Assessing Officer, after considering the explanation tendered by the petitioner, has not made any addition in respect of these two issues in the assessment framed under section 143(3) of the Act. 11. On behalf of the respondent, it has been contended that the issue of allowability of unascertainable expenses while calculating book profit under section 115JB of the Act was never discussed during the original proceedings and therefore, it cannot be said that the Assessing Officer has formed an opinion on this issue. 12. In this regard, it may be germane to refer to the decision of this court in the case of Cliantha Research Ltd. v. Deputy Commissioner of Income­tax, Ahmedabad Circle­I (supra), wherein Page 15 of 21 C/SCA/16767/2018 JUDGMENT it has been held that when during original assessment the claim has been processed at length and after calling for detailed explanation the same was accepted, merely because a certain element or angle was not in the mind of the Assessing Officer while accepting such a claim, it cannot be a ground for issuing notice under section 148 of the Act. 13. In the facts of the present case, in respect of the provision for future development expenses made by the petitioner, the Assessing Officer had called for an explanation and after considering the same, had accepted it. Now, the respondent­ Assessing Officer seeks to reopen the assessment for the purpose of examining it from another angle, namely the issue of allowability of such unascertainable expense while calculating book profit under section 115JB of the Act. 14. At this juncture, it may also be apposite to refer to the decision of the Supreme Court in the case of Income Tax Officer, Ward No.16 (2) v. TechSpan India (P.) Ltd. (supra), wherein it has been held that initiation of re­assessment proceedings under section 147 by issuing notice under section 148 merely because of the fact that now the Assessing Officer is of the view that deduction under section 10A was allowed in Page 16 of 21 C/SCA/16767/2018 JUDGMENT excess, was based on nothing but a change of opinion on the same facts and circumstances which were already in his knowledge even during the original assessment proceedings. 15. In the opinion of this court, the above decisions would be squarely applicable to the facts of the present case inasmuch as insofar as the first issue is concerned, the Assessing Officer had called for details and after considering the explanation given by the assessee, had accepted the same. As regards the other issue, namely the provision for future development expenses, the assessment is sought to be reopened merely for examining the same issue from a different angle. Therefore, on both the counts on which the assessment is sought to be reopened, it would amount to mere change of opinion on the part of the Assessing Officer and hence, the assumption of jurisdiction on the part of the Assessing Officer under section 147 of the Act, lacks validity. 16. Another aspect of the matter is that the assessment of the petitioner is sought to be reopened after a period of more than four years from the end of the relevant assessment year. On a plain reading of the reasons recorded, it is evident that all facts were already before the Page 17 of 21 C/SCA/16767/2018 JUDGMENT Assessing Officer at the time of scrutiny assessment and no fresh material has been relied upon by the respondent for the purpose of reopening the assessment. Under the circumstances, it cannot be said that there is any failure on the part of the petitioner to disclose fully and truly all materials facts necessary for its assessment. Under the circumstances, in the light of the first proviso to section 147 of the Act, the assumption of jurisdiction on the part of the respondent Assessing Officer beyond a period of four years from the end of the relevant assessment year without there being any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment, is without authority of law. 17. Last but not the least, as pointed out by the learned advocate for the petitioner, the petitioner had obtained a copy of the audit para under the Right to Information Act, 2005. A perusal thereof reveals that the audit department had raised objections in respect of both the issues on which the assessment is sought to be reopened. On both the counts, the Assessing Officer did not accept the objections and gave his explanation for not accepting the same. However, the audit department found the reply of Page 18 of 21 C/SCA/16767/2018 JUDGMENT the Assessing Officer was not tenable. Evidently, therefore, the formation of belief that income chargeable to tax has escaped assessment is not that of the Assessing Officer, but is based upon the borrowed satisfaction of the audit department. 18. As held by this court in the case of Adani Exports v. Deputy Commissioner of Income­Tax (Assessments) (supra), 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 an abuse of such authority. 19. The Supreme Court, in the case of Indian and Eastern Newspaper Society v. CIT, (1979) 119 ITR 996 (SC), has held that 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. Page 19 of 21 C/SCA/16767/2018 JUDGMENT 20. In the present case, from the audit para it emerges that upon the audit department bringing the above two issues to the notice of the Assessing Officer, the Assessing Officer did not agree with the objections raised by the audit department and expressed the opinion that the original assessment was not erroneous. However, it appears that on the insistence of the audit department, which found that the reply of the Assessing Officer was not tenable, the respondent­Assessing Officer has reopened the assessment. In the aforesaid premises, it is evident that the Assessing Officer did not form the requisite belief that income chargeable to tax has escaped assessment, but the reasons have been recorded on the basis of borrowed satisfaction of the audit department and not that of the Assessing Officer. Therefore, the basic requirement for assumption of jurisdiction under section 147 of the Act, namely the formation of belief on the part of the Assessing Officer that income chargeable to tax has escaped assessment, is not satisfied in the present case. The assumption of jurisdiction by the Assessing Officer under section 147 of the Act is, therefore, invalid. The impugned notice under section 148 of the Act, therefore, cannot be sustained. Page 20 of 21 C/SCA/16767/2018 JUDGMENT 21. For the foregoing reasons, the petition succeeds and is, accordingly, allowed. The impugned notice dated 23.03.2018 issued by the respondent under section 148 of the Act for assessment year 2012­13 is hereby quashed and set aside. Rule is made absolute accordingly, with no order as to costs. (HARSHA DEVANI, J) (SANGEETA K. VISHEN,J) PRAVIN KARUNAN Page 21 of 21 "