JAGAT JAYANTILAL PARIKH vs. DEPUTY COMMISSIONER OF INCOME TAX

The petitioner is an individual assessed in the same status for last several years under the Income-tax Act, 1961 (for short, hereinafter referred to as “the Act”). The petitioner herein has challenged the validity of the notice issued under Section-148 of the Act dated 21.11.2011, seeking to reopen the assessment framed by the Assessing Officer on scrutiny under Section-143(3) of the Act for the Assessment Year 2007-2008. The facts & details for appreciating the issue raised by the petitioner herein in the present petition under Article 226 of the Constitution of India are as under.

1 The petitioner, in the Assessment Year 2007-2008, declared his total income of Rs.1,89,040/- in the return filed by him under Section 139 of Act. The statement of income and audit report under Section 44AB accompanied the return. In the audit report, under the heading of “Money Market Trading Account-Tax Free” reflected computation of the transaction. The petitioner had claimed a net loss of Rs.13,22,953.43 in one account. All other accounts clubbed together had shown a net loss of Rs.11,52,464/-.

2 A notice under Section 143(2) was issued on 30.10.2009. A letter was addressed by the petitioner-assessee to the Assessing Officer on 09.11.2009, inter alia, urging that qualitative particulars along with valuation had already been furnished in terms of the account. On the basis thereof, the Assessing Officer completed scrutiny assessment under Section 143(3) & passed an order on 14.12.2009. 1.3 Subsequent thereto, it emerges from record that the audit objection in this regard was raised. The Assessing officer, of course, did not agree with office objection. However, on 21.11.2011, the petitioner received a notice under Section 148 of the Act for reopening of the assessment on the ground that the income of the petitioner has escaped the assessment & he was directed to file his return within 30 days.

4 The return was submitted by the petitioner and the ground was raised in the communication dated 20.12.2011 that such reopening was in direct response to the audit objection which was untenable as advance sale securities is a regular feature in the petitioner's business. Request was made for furnishing of copies of return. The reasons were furnished vide letter dated 22.08.2012 which are required to be reproduced as under: “It is seen that you had returned gross total salary income of Rs.2,99,040 and gross business loss of Rs.15,85,666 as per the statements of computation of total income. It is further, noticed that you have debited an amount of Rs.1,24,31,189 towards “provision for purchase” (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs.52,65,699/- had been credited towards “provision for purchases reversed.” The net loss of Rs.13,22,953.43 of this Money Market Trading Account was debited to the Profit & Loss Account and net business loss of Rs.11,52,464/- was taken for computation of business income. After adjustment of various items depreciation etc. the net business loss of Rs.15,85,666 was claimed to be carried forward for set off in future assessment years. Thus, allowance of net provision of Rs.71,65,489.92 (1,24,189.18-52,65,669) was not therefore, laid out or expended wholly and exclusively for the purpose of business profession and was, therefore, not an admissible expenditure leaving a provision only. Thus there was escapement of taxable income for the assessment year 2007- 2008, and as such notice u/s. 148 has been issued.”

5 Objections were filed by the petitioner on 05.09.2012 wherein it is emphasized that the said notice is nothing but a mere change of opinion on the part of the Assessing Officer. Instead of dealing with these objections and pass any order, Assessing Officer passed straightway an assessment order dated 17.10.2012 making an addition of Rs.71,65,490/- and sent a demand notice dated 17.10.2012 of Rs.34,96,100/-.

6 Resultantly, this petition with a prayer to quash and set aside the notice.

On issuance of notice to the other side, affidavit-in-reply has been filed by the Deputy Commissioner, Income-tax, denying all averments of the petition. It is urged that the notice has been issued as the income chargeable to the tax has escaped the assessment and the reasons recorded are also provided for such reopening. The assessee also appeared during the re-assessment proceedings and sought various details. It is further contended that the assessee-petitioner had not objected to such reopening. It is only after tax liability fixed to the tune of Rs.34,96,100/-, such objection have been raised. 2.1 grounds, challenge is made to the notice of re-assessment. i) On scrutiny assessment, the issue raised in the impugned notice has been finalized and therefore, this notice of reopening is nothing but only a change of opinion on the part of the Assessing Officer. ii) The Assessing Officer proceeded to frame fresh assessment without disposing of the objections by a separate reasoned order and thereby, violated the law on the subject. iii) Despite the initial disagreement of Assessing Officer to the objections raised by the audit party, this notice of reopening is issued only at the instance of the audit party.

2 Taking firstly, the last contention of the petitioner, it can be noted that for the Assessment Year 2007-2008, a return of income was filed by the petitioner on 31.10.2007, giving all details and statements coupled with the audit report. A notice was issued by the Assessing Officer under Section 143(2) on 30.10.2009 which was replied to on 09.11.2009. It also enclosed along with the monthly particulars of the trading in G-Security, MMD and Bonds by further mentioning that qualitative particulars with money value had already been given in the account. No further queries were raised and the assessment order was passed on 14.12.2009 on scrutiny, under Section 143(3) of the Income-tax Act taking into account all these aspects.

3 It appears that, subsequent to this, audit objections were raised in the following manner: “Under Section 37 of the Income Tax Act, 1961, any expenditure, not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head “Profit and gains of business or profession. The assessee, Shri Jagat Jayant Parikh, an individual, a dealer in securities, filed its return of income for the Assessment Year 2007-2008 on 30.10.2007 declaring total income, including salary income at Rs.1,89,040 under Section 143(1) of the Income Tax Act, 1961. The return was processed on 19.3.2009 accepting the same income. Thereafter, the return was selected for security under Section 143(3) and the same was finalized on 24.12.2009 determining total income Rs. 2,12,320. Audit scrutiny of the assessment records revealed that the assessee had returned gross total salary income of Rs. 2,99,040 and gross business loss of Rs.15,85,666 as per the statement of computation of total income. It is, further, noticed that the assessee had debited an amount of Rs. 1,24, 31,189.18 towards “Provision for purchase (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs. 52, 65, 699.26 had been credited towards “Provision for purchase reversed .” The net loss of Rs. 13, 22, 953.43 of this Money Market Trading Account was debited to the Profit and Loss Account and net business loss of Rs. 11, 52, 464 was take for computation of business income. After adjustment of various items including depreciation etc., the net business loss of Rs. 15,85,666 was claimed to be carried forward for set off in future assessment years. Thus, allowance of net provision of Rs.71,65,489.92(1,24,31,189.18- 52,65,699) was not, therefore, laid out or expended wholly and exclusively for the purpose of business or profession and was, therefore, not an admissible expenditure being a provisionally. This resulted in irregular allowance of expenses of Rs. 71,65,490 involving short levy of tax of Rs. 32,07,832 as mentioned below”

4 On the basis of such audit objection, notice had been issued to the petitioner on 21.11.2012 under Section 148 of the Income-tax Act, 1961 without furnishing copy of reasons recorded for reopening the assessment. The same were supplied to the assessee on 29.08.2012. The reasons recorded are as follows: “It will be appreciated that under section 37 of the Income tax act, 1961, any expenditure, not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure of personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business of profession shall be allowed in computing the income chargeable under the head “Profit and gains of business or profession. It is seen that you are a dealer in Securities. You filed return of income for the A.Y.2007-2008 on 3.10.2007 declaring total income, including salary income at Rs.1,89,040. The return was processed on 19.03.2009 accepting the same income. Thereafter, the return was selected for scrutiny under section 143(3) and the same was finalized on 24.12.2009 determining total income at Rs.2,12,320. It is seen that you had returned gross total salary income of Rs.2,99,040/- and gross business loss of Rs.15,85,666/- as per the statements of computation of total income. It is further noticed that you have debited an amount of Rs.1,24,31,189 towards “provision for purchase” (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs.52,65,699/- had been credited towards “provision for purchases reversed”. The net loss of Rs.13,22,953.43 of this Money Market Trading Account was debited to the Profit & Loss Account and net business loss of Rs.11,52,464/- was take for computation of business income. After adjustment of various items depreciation etc., the net business loss of Rs.15,85,666/- was claimed to be carried forward for set off in future assessment years. Thus, allowance of net provision of Rs.71,65,489.92 (1,24,189.18 – 52,65,669) was not therefore, laid out or expended wholly and exclusively for the purpose of business profession and was, therefore, not an admissible expenditure leaving a provision only. Thus there was escapement of taxable income for the assessment year 2007-08, and as such notice u/s.148 has been issued.”

5 After such reasons were supplied to the petitioner which are similarly worded as the objection of audit party, he addressed a letter dated 08.10.2012 to the Deputy Commissioner of Income-tax, containing specifically that all these aspects have been duly examined and this is nothing but a change of opinion on the part of the Assessing Officer. It was also contended that the inquiry based on the report of the audit party cannot be the ground for reopening the assessment & entire issue for which reopening was done, was examined in scrutiny assessment by stating thus. “[5] Sir, a sale is complete only when the delivery is made. The Assessee maintains the books of account of Mercantile basis and hence a contract is recorded when prices tend to move in either directions or real time basis. However, a sale remains incomplete when the goods are not delivered. And it is for this reason that an incomplete sale cannot contribute to the profit or loss for any period. It is equally true that accounting entries do not create an income or expenditure and Court have ruled in number of cases that Income Tax is not dependent on the accounting entries passed. Under the circumstances the sales recorded in our books does not give rise to any surplus or loss. However by way of abundant caution the assessee has balance a contractual sale (incomplete) by way of purchases MTM against these incomplete sales to ascertain true profit for the said previous year, had the transaction was completed at the year end at prices prevailing on last day of the previous year. [6] Your Honor's observation that any provision in the books does not constitute expenditure and hence must be disallowed does not hold good ground. The proposal to tax the difference between provision for purchase in the beginning of the year and the provision at year end is mere hypothetical and has no legal or account base. The description “provision for purchase” is a nomenclature to describe purchases at MTM for all pending sale deals and cannot be treated at par with any accounting provision to meet any contingent future liability.”

6 In the instant case, we deemed it appropriate to call for the record of the Assessing Officer for our perusal.

7 It could be noticed from the said record that the Assistant Commissioner of Income-tax had serious objections to the said report of audit party & vide his letter dated 23.03.2011 addressed to the Senior Audit Officer, he, in his communication, ventilated his objections in following fashion:

8 It is thus clear from this communication that the Assessing Officer himself was convinced that audit party's query was raised on wrong understanding of accounting principles and on failure to differentiate between business expenditure and personal expenditure. The Assessing Officer also opined that as far as the personal expenditure was concerned that was pure and simple business expenditure on which liability was booked on provisional value till the actual event get crystalized.

9 It is a well laid down principle that the Assessing Officer requires to form his own belief at the time of reopening the assessment & while issuing notice of reopening. However, on having noticed certain aspects from the report of the audit party if the Assessing Officer chooses to form his opinion to reopen, validity of reopening of such assessment cannot be challenged on the ground of such reopening of assessment being at the instance of audit party.

10 On 01.04.1989, after the Amending Act, 1989, the powers of reopening assessment under Section 147 have been made very wide. What is predominantly questioned in this petition is the absence of exercise of powers given by the Statute under Section 147 by the Assessing Officer and his having reopened the assessment despite his own objection. The Assessing Officer needs to have reason to believe that income has escaped assessment for any assessment year. The term reason to believe provided in Section 147 of the Act would indicate that it is his own subjective satisfaction based on reasonable grounds.

11 This Court has also examined identical issue in yet another matter where other judgments of the Apex Court on the issue are also taken into account. It would be relevant to reproduce some of the relevant paragraphs from the case of Cadila Healthcare Limited (supra), as under: “Counsel vehemently contended that the entire issue has cropped up on the insistence of the Audit Party. He submitted that mere opinion of the audit party cannot form a basis for the Assessing Officer to believe that the income chargeable to tax has escaped assessment. In this regard, counsel relied on the following decisions : (i) CIT v. Lucas T.V.S. Ltd., 249 ITR 306 in which the Apex Court upheld the the decision of the High Court in which the High Court had quashed the reopening proceedings wherein apart from the information furnished by the audit party, the Income Tax Officer had no other information for reopening the assessment. (ii) Agricultural Produce Market Committee v. ITO, (2011) 15 Taxmann.com. 170(Gujarat) wherein Division Bench of this Court was pleased to quash the notice for reopening where the only basis was the revenue audit objection as regards the eligibility of the assessee for exemption. (iii) Adani Exports v. Deputy C.I.T., 240 ITR 224 wherein Division Bench of this Court held as under:

As is more than apparent, assessment was completed on scrutiny. In post assessment period, audit party raised the objection and Assessing Officer had strongly objected to such objections by communicating internally as mentioned hereinabove.

In such background, reasons for reopening if are noted, they are almost identically worded as that of audit report. No material worth the name emerges to indicate any independent application of mind. Facts are quite glaring on the contrary & they clearly establish absence of subjective satisfaction of Assessing Officer. Thus, the ground raised by the petitioner that such notice of reopening is invalid for the Assessing Officer having not formed his independent belief requires to be sustained.

As regards other two grounds raised by the petitioner which are also contested heavily, petitioner sought support from the decision of the Apex Court in GKN Driveshafts (India) Ltd. which makes it obligatory on the part of Assessing Officer to pass a reasoned order on receipt of objections from assessee before finalizing assessment and from CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561(SC) which does not permit change of opinion of Assessing Officer at the time of reopening of assessment. These aspects need not be gone into when the challenge of petitioner on the main ground itself has succeeded effectively. Resultantly, the impugned notice of re-opening dated 21.11.2011 needs to be quashed. Petition is allowed and the same stands disposed of in the above terms. No order as to costs. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) Chandrashekhar*