SHREEJI ASSOCIATES V. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE- 1(2), VADODARA

SCA/18355/2018

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The case involves Shreeji Associates, a partnership firm engaged in construction and development, which challenged a notice issued by the Deputy Commissioner of Income Tax, Vadodara, under Section 148 of the Income Tax Act, 1961, for reopening its assessment for the assessment year 2011-12. The notice was based on the grounds that the firm undervalued its closing stock, leading to an underassessment of income. The firm argued that all material facts were disclosed during the original assessment, and the reopening was based on an audit objection rather than a genuine belief that income had escaped assessment. The court examined whether the reassessment was justified and concluded that it was a case of mere change of opinion, leading to the quashing of the notice.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 750431 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 16-03-2020
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. P.V.S Beedies Pvt. Ltd., N.K. Industries vs. Income Tax Officer, CIT vs. Kelvinator of India Ltd.
• Laws Referred To: Article 226 of the Constitution of India, Section 148 of the Act, Section 143(3) of the Act, Section 147 of the Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: VARUN PATEL
• Assessee Lawyers: B S SOPARKAR
• Keywords: Audit objection; Income Tax; Legal validity; Reassessment; Valuation of closing stock
• Section: 147; 148; 143(3)

Judgement Text

"C/SCA/18355/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 18355 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE J.B.PARDIWALA Sd/­ and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Sd/­ ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? No 2 T o be referred to the Reporter or not ? No 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? No ========================================================== SHREEJI ASSOCIATES Versus THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE­ 1(2), VADODARA ========================================================== Appearance: MR B S SOPARKAR(6851) for the Petitioner(s) No. 1 MR.VARUN K.PATEL(3802) for the Respondent(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 16/03/2020 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. Rule returnable forthwith. Mr. Varun K. Patel, the learned senior standing counsel, waives service of notice of rule for Page 1 of 13 C/SCA/18355/2018 JUDGMENT and on behalf of the Revenue 2. By this writ application under Article 226 of the Constitution of India, the writ applicant has prayed for the following reliefs; “(a) Quash and set aside the impugned notice at Annexure-A to this Petition; (b) Pending the admission, hearing and final disposal of this petition,to stay implementation and operation of the notice at Annexure-A to this petition and stay further proceedings for assessment for A.Y.2011-12. (c ) Any other and further relief deemed just and proper be granted in the interest of justice.” 3. The subject matter of challenge in the present litigation is the impugned notice issued by the Revenue under Section 148 of the Act dated 28th March, 2018 for the purpose of reopening of the assessment for the A.Y .2011-12. 4. The facts, giving rise to this litigation, may be summarized as under; 4.1 The writ applicant is a partnership firm registered under the provisions of the Indian Partnership Act. The writ applicant filed its return of income for the A.Y .2011-12 on 28th September, 2011, declaring its total income at Rs.15,23,720/- The assessment was framed under Section 143(3) of the Act at Rs.20,86,090/- vide assessment order dated 11th February, 2014. Later, the impugned notice under Section 148 of the Act dated 28th March, 2018 came to be issued. The reasons for the purpose of reopening are as under; “Brief details of the Assessee Page 2 of 13 C/SCA/18355/2018 JUDGMENT The assessee firm engaged in the business of construction and development of housing project had filed the return of income for the asst. year 2011-12 on 28.09.2011 declaring totla income at Rs.15,23,720/-. Assessment U/s 143(3) of the Act was completed on 11.02.2014 and the total income of the assessee was assessed at Rs.20,86,090/- 2. Brief facts of information collected/received by the AO: During the year under consideration, the assessee had recognized income based on percentage completion method and the value of the closing stock in profit and loss account was shown at Rs.6,22,13,507/-. However, from the certificate of the site supervisor, it is seen that the closing stock of M/s. Shreeji Associates was bifurcated in the following manner Value of land (after apportioned) Rs.6,00,000 Value of closing material stock Rs.22,13,507 Total value of closing stock Rs.6,22,13,507 From the copy of the document in respect of sale of flat No.702 it is noticed that the assessee is executing two deeds (I) one related to sale of proportionate share of land at Rs. 10 Lakhs and the other related to construction cost of Rs.32 Lakhs. Assessee has sold share of land to 15 purchasers of flat Rs.10 Lakhs at Rs.1,50,00,000/- was sold. The total cost of land was Rs.9,11,00,000/- out of which the land valued at Rs.1,50,00,000/- was sold, therefore, the closing value of land was required to be Rs.7,61,00,000/- (91100000-15000000) against which the assessee had shown the value of closing stock at Rs.6,00,000/- on the basis of valuation of its site supervisor. 3. Analysis of information collected/received From the balance sheet, Form No.3CD, profit and loss account and submission of assessee in respect of valuation of closing stock revealed that the assessee had claimed an expenditure of Rs.9,11,00,000/- on account of purchase of land. The assessee had shown income of Page 3 of 13 C/SCA/18355/2018 JUDGMENT Rs.6,50,09,501/- as sales. The sales income has been bifurcated in two parts viz. (I) sales (1) termed as sale sales of flats 15 flats @ 10,00,000 each totaling to Rs.1,50,00,000/- (I) sales (ii) termed as construction income of Rs.5,00,09,501/- in respect of 36 flats. In the notes forming part to the 3CD report, it has been mentioned by that revenue from the construction is recognized when the construction has been completed with the passing of title. Further, the assesse had followed mercantile method of accounting during the year. Therefore, during the year whatever amount received against sale of residential units by executing sale deed are considered as sales consideration and recorded in profit and loss account. Further amount received for construction of residential unit based on AS-9, revenue recognition to the extent of work completed and risk and reward transferred to prospective buyer recognized as income by transferring to profit and loss account. Assessee has not shown anything under the head 'work-in-progress'. It was further noticed that the assessee has shown closing stock of Rs.6,22,13,506/- as on 31.03.2011. In clause 28 of 3CD report, it has been reported by accountatn that value of closing stock was shown on the basis of valuation done by site supervisor. The bifurcation of the closing stock as worked out by the site supervisor has been discussed in para 2. 4. Enquiries made by the AO as sequel to information collected/received. As per para no.2 5. Findings of the AO From the sample copy of document submitted by the assessee during the course of assessment proceedings u/s.143(3) of the At in respect of sale of flat no.702 to Shri Rajesh Pachoury it was noticed that the assessee is executing two deeds, one related to sale of proportionate share of land at Rs.10,00,000/- and the other related to construction cost at Rs.10,00,000/-. The assessee had sold share of land to 15 purchasers of flat @ Rs.10 Lakhs at Rs.1,50,00,000/-. As the total cost of land was Rs.9,11,00,000/- out of which land valuing at Rs.1,50,00,000/- was sold, the closing value of land was required to be taken at Rs.7,61,00,000/-1,50,00,000/-. Page 4 of 13 C/SCA/18355/2018 JUDGMENT Against this the assessee has shown his closing stock at Rs.6,00,00,000/- on the basis of the valuation by tis site supervisor. This has resulted into under assessment of income by Rs.1,61,00,000/- (7,61,00,000-6,00,00,000). 6. Basis of forming reason to believe and details of escapement of income. During the year under consideration, the assessee has shown sales of Rs.6,50,09,501/- and the sale was bifurcated into two parts (I) sales of flats -15 flats @ Rs.10,00,000 each totaling to Rs.1,50,00,000/- in respect of 36 flats. The assessee has shown the closing stock at Rs.6,22,13,206/- as on 31.03.2011. But , however, the assessee has not mentioned anything under the head 'work-in-progress' The value of closing stock was calculated based on the certificate of the site supervisor. On the basis of the document with respect to sale of flat no.702, it is seen that the assessee is executing two deeds (I) one related to sale of proportionate share of land at Rs.10 Lakh and the other is related to construction cost at Rs.32 lakh. So, accordingly, the assessee had sold share of land to 15 purchasers of flat @ 10 lakhs valuing for Rs.1,50,00,000/-. Further the assessee had claimed an expenditure of Rs.9,11,00,000/- being the cost purchase of the land. Therefore, after taking into consideration the assessee's working of sale of deeds i.e. one related to sale of proportionate share of land, the closing stock of the land was required to be Rs.7,61,00,000/- (9,11,00,000-1,50,00,000). Against this, the assessee has shown the closing stock at Rs.6,00,00,000/- as per the valuation given by the site supervisor. By this, the assessee has undervalued the closing stock by Rs.1,61,00,000/- (7,61,00,000-6,00,00,000) 7. Seventh paragraph will include escapement of income chargeable to tax in relation to any assets (including financial interest in any entity) located outside India. Not applicable. 8. Findings of the AO on true and full disclosure of the material facts necessary for assessment under Proviso to section 47. Page 5 of 13 C/SCA/18355/2018 JUDGMENT As per the notes forming part of form no.3CD, revenue from construction is recognized when the construction has been completed with the passing of title. The assessee is following mercantile system of accounting. During the year, whatever amount is received against sale of residential units by executing sale deed are considered as sales consideration and the same is to be recorded in the profit and loss account. Further amount received for construction of residential unit, based on AS-9, revenue recognition of the extent work completed and risk and reward transferred to prospective buyer recognized as income by transferring to profit and loss account. Assessee has shown anything under the head work-in-progress. Based on the certificate of the site supervisor, the assessee has shown closing stock at Rs.6,22,13,507/- after bifurcating value of land at Rs.6,00,00,000/- and value of closing material stock at Rs.22,13,507/-. On the basis of the document with respect to sale of flat no.702, it is seen that the assessee is executing two deeds (I) one related to sale of proportionate share of land at Rs. 10 Lakh and the other is related to construction cost at Rs.32 Lakh. So, accordingly, the assessee had sold share of land to 15 purchasers of flat @ 10 lakhs valuing for Rs.1,50,00,000/-. Further, the assessee had claimed an expenditure of Rs.9,11,00,000/- being the cost purchase of the land. Therefore, after taking into consideration, the assessee's working of sale of deeds i.e., one related to sale of proportionate share of land, the closing stock of the land was required to be Rs.7,61,00,000/- (9,11,00,000-1,50,00,000). Against this, the assessee has shown the closing stock at Rs.6,00,00,000/- as per the valuation given by the sale supervisor. By this, the assessee has undervalued the closing stock by Rs.1,61,00,000/- (7,61,00,000-6,00,00,000) which has resulted into under assessment of Rs.1,61,00,000/-. 9. Applicability of provision of section 147 /151 to the facts of the case. In this case, return of income was filed for the year under consideration and regular assessment u/s.143(3) was made on 11.02.2014. Since 4 years from the end of the Page 6 of 13 C/SCA/18355/2018 JUDGMENT relevant year has expired in this case, the requirements to initiate proceeding u/s.147 are reason to believe that income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for the assessment year under consideration. It is pertinent to mention here that reasons to believe that income has escaped assessment for the year under consideration have been recorded above (refer paragraph 2 to 6). I have carefully considered the assessment records containing the submission made by the assessee in response to various notices issued during the assessment /re-assessment proceedings and have noted that the assessee has not fully and truly disclosed the material facts necessary for his assessment for the year under consideration. It is evident from the above facts that the assessee had not truly and fully disclosed material facts necessary for the assessment for the year under consideration thereby necessitating reopening u/s.147 of the Act. It is true that the assessee has filed a copy of the annual report and audited P&L A/c and balance sheet along with the return of income where various information/material were disclosed. However, the requisite full and true disclosure of all material facts necessary for assessment has not been made as noted above. It is pertinent to mention here that even though the assessee has produced books of accounts, annual report, audited P&L A/c and balance sheet or other evidences as mentioned above, the requisite material facts as noted above in the reasons for reopening were embedded in such a manner that material evidence could not be discovered by the AO and could have been disclosed with due diligence, accordingly, attracting provisions of explanation 1 of section 147 of the Act.“ 4.2 The writ applicant filed its objections with regard to the reopening of the assessment dated 14th August, 2018. 4.3 The objections raised by the writ applicant, ultimately, came to be overruled vide order dated 5th October, 2018. The order, overruling the objections, reads thus; Page 7 of 13 C/SCA/18355/2018 JUDGMENT “First and foremost, the case has been re-opened by the issuance of notice u/s.148 of the Act dated 28.03.2018 after duly recording the requisite reasons and taking prior approval from the Principal Commissioner of Income-tax-1, Vadodara and duly serving upon the assessee. Furthermore, it is well within 6 years from the end of the relevant assessment year. Therefore, the reopening of the instant case is technically and legally valid. Secondly, given the facts narrated herein above, the Revenue had a 'reason to believe” that in the case of the assessee, an income to the extent of Rs.1,61,00,000/- which was chargeable to tax had escaped assessment. Therefore, it was held that the case of the assessee for the A.Y. .2011-12 was a fit case for re-opening of assessment after due application of mind by the AO. 9. In view of the above facts, it can be considered that the case is correctly re-opened as per the reasons recorded. Under the circumstances, the reassessment proceedings initiated are legal and valid and, therefore, the objections to the reassessment proceedings /submissions of the assessee made against the re-assessment proceedings do not hold good & accordingly, the same are rejected and filed.” 4.4 Being dissatisfied with the action on the part of the Assessing Officer in reopening the assessment, the writ applicant is here before this Court with the present writ application. 4.5 Mr. B.S. Soparkar, the learned counsel appearing for the writ applicant submitted that the impugned notice under Section 148 of the Act dated 28th March, 2018 is beyond the period of four years from the end of the relevant assessment year. According to Mr. Soparkar, all the necessary information had been furnished before the Assessing Officer for the purpose of scrutiny assessment and there was no failure on Page 8 of 13 C/SCA/18355/2018 JUDGMENT the part of his client to disclose fully and truly all the material facts relevant for the purpose of assessment. Mr. Soparkar would submit that the assumption of jurisdiction on the part of the Assessing Officer under Section 147 of the Act could be termed as one without any authority of law. Mr. Soparkar also pointed out that the assessment is sought to be reopened on the basis of the audit objection and not on the basis of the formation of any belief on the part of the Assessing Officer that any income chargeable to tax had escaped assessment. In the last, Mr. Soparkar submitted that even otherwise no income could be said to have escaped assessment as the writ applicant recorded the closing stock on the basis of the accounting principles. In such circumstances, referred to above, Mr. Soparkar prays that there being merit in this writ application, the same be allowed and the impugned notice may be quashed. 4.6 On the other hand, this writ application has been vehemently opposed by Mr. Patel, the learned senior standing counsel appearing for the Revenue. Mr. Patel would submit that if a particular issue is brought to the notice of the Assessing Officer by the audit party, and the Assessing Officer, on his own, upon application of mind, finds that the ground is valid, the reopening of the assessment cannot be quashed merely because such ground was brought to the notice of the Assessing Officer by the audit party. In support of his submission, Mr. Patel seeks to place reliance on the decision of the Supreme Court in the case of Commissioner of Income Tax vs. P .V .S Beedies Pvt. Ltd., 1999 237 ITR 13. Mr. Patel pointed out that the decision of the Supreme Court in the case of P .V.S. Beedies (supra) has been referred to and relied upon Page 9 of 13 C/SCA/18355/2018 JUDGMENT by a Coordinate Bench of this Court in the case of N.K. Industries vs. Income Tax Officer, 362 ITR 502. Mr. Patel invited the attention of this Court to the observations made by the Coordinate Bench in N.K. Industries (supra) as under; “With respect to the first of the two reasons recorded by the Assessing Officer therefore it clearly emerges that she was acting at the instance of the audit party, though she herself held a contrary belief that no income chargeable to tax has escaped assessment on these two counts. Had this being the sold reason for issuing notice for reopening, we would have perhaps allowed the petition and quashed the notice. In the present case, however, the Assessing Officer was convinced that on third ground recorded in the reasons, income chargeable to tax had escaped assessment. It is true that such ground was also brought to her notice by the audit party and that by itself would not mean that she was acting at the instance of the audit party. As held by the Supreme Court in case of Commissioner of Income-Tax v. P.V.S Beedies Private Limited, reported in [1999] 237 ITR 13 (SC), if a particular issue is brought to the notice of the Assessing Officer by the audit party and the Assessing Officer of his/her application of mind finds that the ground is valid, reopening of assessment cannot be quashed merely because such ground was brought to the notice of the Assessing Officer by the audit party. In this context, even the counsel for the petitioner was unable to dispute that the question of depreciation require re-examination since the question whether the asset for which the depreciation was claimed was put to use before 30th September of the year under consideration, and therefore, whether full depreciation at the specified rate during the year under consideration was allowable.” 4.7 Mr. Patel, thereafter, invited our attention to Page-24 of the paper-book. Page-24 of the paper-book is the trading Page 10 of 13 C/SCA/18355/2018 JUDGMENT account ended on 31st March, 2011. Referring to the document of trading account, he pointed out that the purchase price of the land is Rs.9,11,00,000/-. By sales, the total is shown at Rs.6,50,09,501/-. The closing stock has been shown at Rs.6,22,13,506/-. According to Mr. Patel, from the balance-sheet Form No.3CD, i.e, the tax audit report, the assessee had claimed an expenditure at Rs.9,11,00,000/- on account of the purchase of the land. The assessee had shown income at Rs.6,50,09,501/- as sales. The income towards the sales was bifurcated in two parts, i.e. (I) sales of 15 flats in numbers at the rate of 10 Lakh aggregating to Rs.1,50,00,000/-. and (ii) sales termed as construction income of Rs.5,00,09,501/- in respect of 36 flats. Mr. Patel further pointed out that the assessee showed the closing stock of Rs.6,22,13,506/- as on 31st March, 2011. This was done on the basis of the valuation undertaken by the site supervisor. However, the principal argument of Mr. Patel is that there was no basis or any foundation for the site supervisor to issue such a certificate. Mr. Patel further pointed out that it is only on the basis of the sample copy of the document that it was revealed that the assessee had executed two deeds, one relating to the sale of proportionate share of land at Rs.10,00,000/- and the other relating to the construction cost at Rs.32,00,000/-. Mr. Patel pointed out that the assessee declared his closing stock at Rs.6,00,00,000/- on the basis of the valuation undertaken by the site supervisor and which resulted into under assessment of income by Rs.1,61,00,000/- According to Mr. Patel, the case is not one of just change of opinion but, in fact, the declaration on the part of the assessee was in such a manner that the Assessing Officer could not have carried out the assessment in the manner it was shown. In such circumstances, referred to Page 11 of 13 C/SCA/18355/2018 JUDGMENT above, Mr. Patel prays that there being no merit in this writ application, the same be rejected. ANAL YSIS 5. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is whether the impugned notice for reassessment under Section 148 of the Act should be quashed. 6. With regard to the objection or rather the argument of Mr. Soparkar that the reassessment is on the basis of the report of the audit party, we are of the view that the same, by itself, may not be sufficient to quash the impugned notice. The position of law in this regard is well settled. The two decisions, referred to above, i..e, one of the Supreme Court in the case of P .V.S. Beedies Pvt. Ltd. (supra) and another of this Court in the case of N.K. Industries (supra) makes the picture clear. 7. However, we are not able to accept the submission of Mr. Patel that the case is not one of mere change of opinion. We take notice of the fact that the sample copy of the document in respect of the sale of Flat No.702 in favour of one Shri Rajesh Panchori was already on record. If it is the case of the revenue that the reassessment is on the basis of the materials which came to be noticed, for the first time, through the sample copy of the document, then we are afraid, the same sample copy of the document was very much before the Assessing Officer during the time of scrutiny assessment. Besides the same, the only ground on which the assessment is sought to be reopened is the under valuation of the stock to the extent of Page 12 of 13 C/SCA/18355/2018 JUDGMENT Rs.1,60,00,000/-. It appears that the assessee had furnished all the necessary details with regard to the valuation of the stock. The stock certificate of the valuation issued by the site supervisor was also on record. In the tax audit report, we find reference as regards the method of valuation. It has been stated therein that “the assessee is a developer and builder”. The assessee is in the business of construction and sale of flats, buildings, land etc. it is impracticable to maintain item wise quantitative records of the items of building materials, which is shown in the Balance-Sheet as a closing stock in trade which is incomplete work at site. The valuation is taken on the basis of the valuation carried out by the site engineer. We, once again, go back to the reasons assigned for the purpose of reassessment. In the reasons, we find reference of the balance-sheet Form No.3CD, profit and loss account, and the very same material is now sought to be looked into for the purpose of reassessment. 8. In the overall view of the matter, we are convinced that this is a case of mere change of opinion. The law in this regard is well settled as explained by the Supreme Court in the case of CIT vs. Kelvinator of India Ltd., reported in (2010) 320 ITR 561 (SC) . 9. In the result, this writ application succeeds and is hereby allowed. The impugned notice is hereby quashed and set aside. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) Vahid Page 13 of 13 "