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

Rule.   Mrs.   Kalpana   Raval,   learned   senior standing   counsel,   waives   service   of   notice   of rule on behalf of the respondent.

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.

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.

Thereafter,   by   the   impugned   notice   dated 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 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.

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. 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.

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 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.

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:

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 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 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 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

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

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

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.

1 As   regards   the   contention   raised   by   the 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.

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 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

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.

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.

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.

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 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.

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.

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 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.

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.

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 Assessing   Officer   at   the   time   of   scrutiny assessment and no fresh material has been relied upon   by   the   respondent   for   the   purpose   of reopening

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 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.

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.

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.

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.

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