SURBHI ASSOCIATES THROUGH PARTNER SURESHBHAI DAHYABHAI PATEL V. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE GANDHINAGAR OR HIS SUCCESSORS TO OFFICE

SCA/22510/2019

AI Insights

The case involves Surbhi Associates, a partnership firm engaged in real estate development, which challenged the notice for reopening of its income tax assessment for the Assessment Year 2012-2013. The original assessment was completed under section 143(3) of the Income Tax Act, 1961, accepting the declared income. However, a notice under section 148 was issued later, alleging that income had escaped assessment due to incorrect reduction of land cost from work in progress, contrary to a revised ICAI guidance note. The petitioner argued that the reopening was based on the same facts as the original assessment and constituted a change of opinion, not a valid ground for reopening under the Act.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 747264 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 26-07-2022
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income tax v. Kelvinator of India Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M R BHATT; KARAN SANGHANI
• Assessee Lawyers: NUPUR SHAH
• Keywords: Change of opinion; ICAI Guidance Note; Income Tax; Reopening of assessment; Work-in-progress
• Section: 147; 148; 143(3); 142(1); 151

Judgement Text

"C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 22510 of 2019 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 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 ? ========================================================== SURBHI ASSOCIATES THROUGH PARTNER SURESHBHAI DAHYABHAI PATEL Versus ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE GANDHINAGAR OR HIS SUCCESSORS TO OFFICE ========================================================== Appearance: MS NUPUR D SHAH(10233) for the Petitioner(s) No. 1 MR MR BHATT SENIOR ADVOCATE WITH MR KARAN SANGHANI FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 26/07/2022 ORAL JUDGMENT Page 1 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned advocate Mr. Nupur D. Shah for the petitioner and learned Senior Advocate Mr. M.R. Bhatt with learned advocate Mr. Karan Sanghani for M.R. Bhatt and Co. for the respondent. 2.Having regard to the controversy involved in the present case which lies in a very narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing. 3.Rule returnable forthwith. Learned advocate Mr. Karan Sanghani waives service of notice of rule on behalf of the respondent. 4.By this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice dated 28.03.2021 issued Page 2 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 under section 148 of the Income Tax Act, 1961 (For short “the Act”) for reopening of the assessment proceedings for the Assessment Year 2012-2013 along with order dated 22.11.2019 disposing of the objections raised by the petitioner 5.Brief facts of the case are as under : 5.1) The petitioner is a partnership firm and is engaged in construction business, developing real estate and housing project. 5.2) The petitioner assessee filed its original return of income for the Assessment Year 2012-2013 through electronic mode on 26.09.2012 declaring total income of Rs.57,68,130/-. 5.3) Case of the petitioner was taken for scrutiny assessment and respondent issued Page 3 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 notices under section 142(1) of the Act on 6.08.2014, 23.09,2014, 15.12.2014 to which the petitioner submitted its reply on 22.12.2014, 03.01.2015, 19.01.2015, 02.02.2015, 18.02.2015 and 02.03.2015. 5.4) The respondent issued yet another notice under section 142(1) of the Act on 20.03.2015 to which the petitioner replied by its letter dated 25.03.2015. 5.5) The Assessing Officer passed the assessment order under section 143(3) of the Act on 30.03.2015 accepting and determining total income of the assessee at Rs.57,68,130/-. 5.6) The petitioner thereafter, received notice under section 148 dated 28.03.2019 for reopening the assessment. Page 4 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 5.7) The petitioner submitted its reply dated 17.04.2019 challenging the validity of the notice issued under section 148 of the Act for reopening the assessment. 5.8) The petitioner company filed its return of income under section 148 of the Act on 27.04.2019 and submitted that same before the respondent vide letter dated 29.04.2019. 5.9) The respondent thereafter issued notice under section 143(2) of the Act on 24.05.2019 and notice under section 142(1) of the Act on 31.05.2019. 5.10) The petitioner company requested for copy of reasons recorded by letters dated 28.06.2019 and 27.08.2019. 5.11) The respondent addressed a letter dated 30.08.2019 stating that copy of the Page 5 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 reasons have already been provided to the petitioner. 5.12) The petitioner addressed a letter dated 28.09.2019 informing the respondent that the petitioner has still not received the reasons recorded by the respondent which was duly verified by the petitioner’s online portal. 5.13) The respondent thereafter provided the reasons recorded by the Assessing Officer for reopening of assessment on 11.10.2019. The reasons recorded by the Assessing Officer for reopening the assessment under section 147 of the Act read as under : “Reasons for reopening of the assessment in the case of Surbhi Associates for A.Y. 2012-13 1 Brief details of the Assessee: Assessee is a firm engaged in real estate development. Assessee filed its Page 6 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 return of income for AY 2012-13 on 28.09.2012 declaring income of Rs. 5768130. The same was assessed u/s 143(3) vide order dated 30.03.2015. Assessee is following percentage of completion method for recognition of revenue. 2. Brief details of information collected/received by the AO : During the year under consideration, assessee has shown value of workin progress at Rs. 2,64,76,389 as on 31.03.2012. It was however noticed that value of work in progress as on 31.03.2012 was Rs. 3,40,62,303. The assessee reduced the cost of land of Rs. 75,85,919 from this amount and resultant value of Rs. 2,64,76,384 was accounted in P/L and balance sheet. As revised guidance note issued by ICAI now prohibits reduction of cost of land for WIP under PCM, the same should not have been reduced from the value of work in progress. 3. Analysis of information collected/received: upon analysis of the information collected it is seen that the assessee has wrongly reduced the value of work in progress by Rs. 75,85,919 by reducing the cost of land from the work in progress which is not allowed as per the revised guidance note issued by ICAI. 4. Enquiries made by the AO as sequel to information collected/received: Page 7 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 A perusal and analysis of the information collected material available shows that income has escaped assessment and there is no need for further enquiries u/s. 133(6) to establish the same. 5. Finding of the AO: It is found that assessee has committed default in reducing the value of work in progress by Rs 75-89,919 which as per the revised guidance note issued by Allis prohibited. Therefore, is seen that income to the tune of Rs. 75,85,919 has escaped assessment for the year under consideration. 6. Basis of forming reason to believe and details of escapement of Income: From the information collected in this case, it is prima facie concluded that income amounting to Rs. 75,85,919 has escaped assessment as the assessee committed default in reducing the value of work in progess by Rs. 75,85,919 which is prohibited as per the revised guidance note issued by ICAI. 7. Basis of forming reason to believe and details of income chargeable to tax in relation to any assets (including financial interest in any entity) located outside India: No information of assets located outside India is available. 8. Finding of the AO on true and full disclosure of the material facts necessary for assessment under proviso Page 8 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 to section 147: The assessee has not truly and fully disclosed the facts which is clear from the instance that it has wrongly reduced the value of work in progess by reduced the cost of land which was not allowed as per the revised guidance note issued by ICAI. Therefore, it is evident that the facts of the case are covered by the Explanation 1 to section 147 of the Act. 9. Applicability of the provisions of section 147/151 to the facts of the case; In this case a return of income was filed for the year under consideration and regular assessment u/s 143(3) was made on 30.03.2015. Since, 4 years from the end of the relevant year has expired in this case, the requirements to initiate proceeding u/s 147 of the Act 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 his 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 in above paras 2, 3, 5 & 6.1 have carefully considered the assessment records containing the submissions made by the assessee in response various notices issued during the assessment/re- assessment proceedings and have noted that the assessee has not fully and truly disclosed the following material Page 9 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 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 his assessment for the year under DEPARTMENT consideration thereby necessitating reopening u/s 147 of the Act. It is true that the assessee has filed a copy of annual report and audited P&L A/ c and balance sheet along with 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 evidence 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 discovered with due diligence, accordingly attracting provisions of Explanation 1 of section 147 of the Act. It is evident from the above discussion that in this case, the issues under consideration were never examined by the AO during the course of regular assessment. It is important to highlight here that material facts relevant for the assessment on the issue under may be embedded in annual report audits P&L Page 10 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 A/c, balance sheet and books of account in such manner that it would require due diligence by the AO to extract these information. For forested reasons is not a case of change of opinion by the AO. In this case more than four years have lapsed from the end of assessment year under consideration. Hence necessary section to issue notice u/s. 148 has been obtained separately from Principal Commissioner of Income Tax as per the provisions of section 151 of the Act.” 5.14) The respondent thereafter issued notice under section 142(1) of the Act on 15.11.2019 to which the petitioner submitted its reply on 19.11.2019. 5.15) Thereafter, yet another notice under section 142(1) of the Act was issued on 22.11.2019. 5.16) It is the case of the petitioner that respondent issued the order dated 22.11.2019 disposing of the objections against the reasons recorded despite the Page 11 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 petitioner not even having submitted the objections against the reasons recorded for reopening of the assessment. 5.17) The petitioner thereafter submitted its objections against reopening assessment vide letter dated 6.12.2019. 5.18) The respondent thereafter issued show cause notice dated 11.12.2019 against the petitioner. 5.19) Being aggrieved by the action of the respondent, the petitioner has preferred this petition. 6.Learned advocate Ms. Nupur Shah for the petitioner submitted that during the course of original assessment proceedings, the petitioner vide submissions dated 2.2.2015 and 18.02.2015 had justified that the Page 12 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 petitioner has accounted revenue as per ICAI Guidance note and has calculated WIP accordingly. It was submitted that the petitioner had explained the WIP of Rs. 2,64,76,389/- with regard to the methodology adopted i.e. real estate guidance note followed by the petitioner culminating into the resultant amount of WIP based on revenue recognition. It was submitted that the Assessing Officer after verification of entire details passed an order under section 143(3) of the Act wherein no disallowance has been made in respect of the amount of Work in Progress of Rs.2,64,76,389/-. It was further submitted that the respondent authority is seeking to make an addition for an amount of Rs. 75,85,919/- towards reduction of cost of land on the same set of facts on which the scrutiny assessment was made under section 143(3) of the Act. Page 13 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 6.1) Learned advocate Ms. Shah submitted that the entire assumption of jurisdiction by the respondent authority is patently bad in law inasmuch as the reasons recorded clearly show that notice under section 148 of the Act has been issued on the basis of assessment proceedings which cannot be the basis for reopening of the assessment under section 147 read with section 148 of the Act. It was further submitted that where an assessment under section 143(3) of the Act has been made for the relevant assessment year, no action can be taken under section 147 of the Act after expiry of four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment by reason of failure on part of the assessee to disclose fully and truly all material facts necessary for assessment. 6.2) Learned advocate Ms. Shah further Page 14 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 submitted that there is no independent belief/reason to believe of the respondent Assessing Officer for undertaking exercise of reopening under section 147 of the Act and the entire reopening seems to be at the instance of audit department. 6.3) It was further submitted that the revised guidance note issued by ICAI is only applicable to all projects in real estate which commenced on or after April 1, 2012 whereas the petitioner’s case has been reopened for Assessment Year 2012-2013 relevant to Financial Year 201-2012 ending on 31st march, 2012 and therefore, the guidance note is not applicable to the facts of the case of the petitioner. It was therefore, submitted that the assumption of the jurisdiction by the Assessing Officer to reopen the assessment would amount to change of opinion. Page 15 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 7.On the other hand learned Senior Advocate Mr. M.R. Bhatt for the Revenue submitted that the petitioner is filed at a pre-mature stage inasmuch as only notice under section 148 read with section 147 of the Act and in the event the petitioner is aggrieved by the reassessment, alternative efficacious remedy is available by way of an appeal before the CIT(Appeals) and thereafter before the Tribunal. 7.1) Learned Senior Advocate Mr. Bhatt further submitted that after the order of assessment under section 143(3) of the Act, was passed, it was noticed that for the year under consideration, the assessee disclosed value of work in progress as on 31.3.2012 at Rs. 2,64,76,389/- whereas the actual work in progress was at Rs. 3,40,62,303/-. It was further submitted that the assessee arrived Page 16 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 at value of work in progress at Rs. 2.64 crores because it deliberately reduce the cost of land of Rs. 75.85 Lakh from the total amount of work in progress and the revised guidelines issued by ICAI prohibits the reduction of cost of land from work in progress. It was therefore, submitted that there is reason to believe that income chargeable to tax has escaped assessment on account of failure on part of the assessee to disclose the correct facts and therefore the notice issued under section 148 of the Act is a valid notice. 8.Considering the submissions made by the learned advocates on both the sides, it appears that the impugned notice under section 148 of the Act, 1961 is issued only on the ground that the assessee has committed default in reducing the value of work in progress by Rs. 75,85,919/- which as per the Page 17 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 revised guidance note issued by ICAI is prohibited and therefore, the income to the tune of Rs. 75,85,919/- has escaped assessment for the year under consideration. 9. It is not in dispute that during the course of original assessment proceedings under section 143(3) of the Act, 1961, all the details were fully and truly disclosed by the petitioner and there is no escapement of income chargeable to tax on account of failure on part of the assessee to disclose fully and truly all material facts. 10. From the facts on record, it appears that during the original assessment proceedings, the Assessing Officer had called for details regarding the working of WIP and the petitioner has explained in detail about the WIP of Rs. 2,64,76,389/- and also the methodology adopted by the petitioner. The Page 18 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 Assessing Officer after verification of entire details passed the order under section 143(3) of the Act wherein no disallowance was made in respect of the amount of work in progress. Thus it appears that the respondent authority is seeking to make addition of Rs.75,85,919/- towards reduction of cost of land on the same set of facts on which the scrutiny assessment was made though the assessee has fully and truly disclosed all material facts necessary during the original assessment proceedings for the relevant assessment year. 11. It is therefore, apparent that there is change of opinion by the Assessing Officer to reopen the assessment for the Assessment Year 2012-2013, more particularly, when the issue of value of work in progress as per the revised guidance note issued by ICAI is already considered during the assessment Page 19 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 proceedings under section 143(3) of the Act, 1961. The Assessing Officer cannot have any jurisdiction to issue the notice under section 148 of the Act, 1961 for reopening the assessment for the year under consideration more particularly, when the assessment is sought to be reopened beyond a period of four years as held by the Supreme Court in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in 2010(2) SCC 723 as under: “2. A short question which arises for determination in this batch of civil appeals is, whether the concept of \"change of opinion\" stands obliterated with effect from 1st April, 1989, i.e., after substitution of Section 147 of the Income Tax Act, 1961 by Direct Tax Laws (Amendment) Act, 1987? xxxx 6. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Page 20 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 Act [with effect from 1st April, 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 re- open the assessment. Therefore, post- 1st April, 1989, power to re-open 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 re-open assessments on the basis of \"mere change of opinion\", which cannot be per se reason to re- open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of \"change of opinion\" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of \"change of opinion\" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, 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 Page 21 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 the Act. However, on receipt of representations from the Companies against omission of the words \"reason to believe\", Parliament re-introduced the said expression and deleted the word \"opinion\" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows: \"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147.--A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same.\" 12. In view of foregoing reasons, Page 22 of 23 C/SCA/22510/2019 JUDGMENT DATED: 26/07/2022 considering the facts of the case impugned notice under section 148 of the Act, 1961 is not tenable in law and is accordingly quashed and set aside and consequentially order dated 22.11.2019 disposing of the objections raised by the petitioner is also quashed and set aside. 13. Rule is made absolute to the aforesaid extent. No order as to costs. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 23 of 23 "