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Facts
The assessee, engaged in infrastructure projects, filed its return for AY 2012-13. The AO reopened the assessment u/s 147, alleging that a provision for expected loss deducted from WIP was contingent and should be added back to income. The original assessment u/s 143(3) had already examined this issue.
Held
The Tribunal held that the reopening of assessment was based on a mere change of opinion, as the issue was already examined during the original assessment without any new tangible material. Therefore, the reassessment proceedings and the consequential order were quashed.
Key Issues
Whether reopening of assessment u/s 147 is valid when the issue was already examined in the original assessment u/s 143(3) without new tangible material, constituting a mere change of opinion.
Sections Cited
147, 143(3), 148, 37(1), 144
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Income Tax Appellate Tribunal, “D” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
Assessment Year: 2012-13 Das Offshore Limited Deputy Commissioner of Income Sagar Uday, Plot No. F-3, Tax, Circle 1(2), Agroli, Sector 29, Mumbai Behind CIDCO Bhawan, Vs. CBD Belapur, Navi Mumbai - 400614 Maharashtra (PAN: AAACD5996K) (Appellant) (Respondent) Present for: Assessee : Mr. Fenil Bhatt, Ramesh Jain, CAs Revenue : Shri. Mahadevan A.M. Krishanan, Addl. CIT Date of Hearing : 22.04.2025 Date of Pronouncement : 26.06.2025 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2023-24/1055302006(1), dated 22.08.2023 passed against the assessment order by Deputy Commissioner of Income-tax, Circle 1(2), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 27.11.2017 for Assessment Year 2012-13.
Grounds taken by the assessee are reproduced as under:
Das Offshore Ltd. AY 2012-13 “1. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the action of re-opening of the assessment proceeding U/s 147 of the income Tax Act 1961.
2. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the Order passed by the learned DCIT which, is illegal, bad in law, ultra virus and contrary to the provisions of the law and facts, since the order of the learned DCIT is passed without giving proper opportunity to the assessee of hearing and explaining the case.
3. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the Order passed by the learned DCIT. The same is bad in law as proper service of the notices was not made to the assessee, the same is in violation of the principles of natural justice on various issues as stated herein.
4. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the additions of Rs.5,09,65,000/-on account of provision for unexpected losses and/or closing calculation of WIP, without affording proper opportunity of being heard to the assessee.
5. On the facts and in the circumstances of the case and in law, the Order passed by the learned CIT (A) is illegal, bad in law, ultra virus and contrary to the provisions of the law and facts, and the same is passed without application of mind and in violation of the principles of natural justice on various issues as stated hereinabove. The order so confirmed by the learned CIT (A) is without any basis and based on assumption, surmises, whims and suspicion.
On the facts and in the circumstances of the case and in law the Hon'ble members are requested to condone the delay in filing the appeal before the Hon'ble ITAT.”
At the very outset, it is noted that there is a brief delay of 10 days in filing the present appeal before the Tribunal, for which application for condonation of delay along with affidavit is placed on record. We have gone through the said documents explaining the reasons for the brief delay of 10 days which justifies sufficient cause to condone the same. Considering the explanation on record, we find it appropriate to condone the delay and take up the matter for adjudication.
Brief facts of the case are that assessee is engaged in the business of execution of structural and other infrastructure projects for its clients which include ONGC, CIDCO, MMRDA etc. Assessee had originally filed its return on 23.03.2013 reporting total income at Rs.18,46,01,300/-.
Das Offshore Ltd. AY 2012-13 Scrutiny assessment u/s.143(3) of the Act was completed on 26.02.2015, assessing total income at Rs.18,51,01,300/-, by making an addition of Rs.5 lacs. Subsequently, from the reasons to believe recorded by the Ld. AO, it is noted that he on verification of case records, found that assessee had deducted an amount of Rs.5,09,65,000/- from the closing work in progress (WIP) on account of provision for expected loss in a project. From his perusal of records, he noted that provision made for expected loss is actually not incurred and not added back to the income in the statement of total income during the year under consideration. He also took note of statement of significant accounting policies in respect of valuation of inventories for the job work, for which it was mentioned that it is based on technical assessment. He thus, concluded that provision made for expected loss is based on Accounting Standard and Accounting Policy adopted by the assessee. Thus, it is a contingent liability which is required to be added back for computing total income. Ld. AO also noted in para 3 of the reasons to believe recorded by him that for AY 2013-14 i.e. the subsequent year, assessee had reversed the provision and fresh provision was made. Based on this accounting practice, ld. AO concluded that the provision is contingent in nature. He thus, arrived at reasons to believe that income to the extent of Rs.5,09,65,000/- has escaped assessment for AY 2012-13 within the meaning of section 147. Accordingly, notice u/s.148 of the Act, was issued dated 06.03.2017.
4.1 In the course of reassessment proceeding, Ld. AO issued show cause notice asking the assessee to rebut the observation and finding noted in reasons to believe recorded for the purpose of reopening, corroborating by documentary evidences. In this respect he noted as under:
Das Offshore Ltd. AY 2012-13 “3. On verification of the case records, it is found that you have deducted an amount of Rs. 5,09,65,000/- from the closing work in progress on account of provision for expected loss in a project. Please refer to note-15 of the balance sheet. From perusal of records, it is noticed that provision made for expected loss is actually not incurred and not added to the income in the statement of total income during the year under consideration. In the “statement of Significant Accounting Policies” under the head “Valuation of Inventories” in respect of job works in progress, it is mention that it is based on technical assessment. Further, it is stated that “loss, if any, on a project is taken into account as soon as it can be estimated with reasonable accuracy in accordance with the Accounting Standard AS-7.” Therefore, the provision made for expected loss would have been added back while computing taxable income as per section 37(i) of the Act. As per the provisions of section 37(i) of the Income Tax Act, any expenditure (not being expenditure of the nature describe infections 30 to 36 and not being in the nature of capital of personal) laid out or expanded only and executively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profit and gains of business or profession.
According to him, there were no response from the assessee. Since there was no compliance from the assessee, he proceeded to complete the assessment ex-parte u/s.144 of the Act. While completing the reassessment, in para 4 he noted, from examination from profit and loss account for year under consideration, more particularly, Note No.22(b) to the profit and loss account and Note No.15 to the balance sheet that assessee computed closing WIP after providing expected loss on ongoing project of Rs.5,09,65,000/- which has resulted into reduction of net profit by this amount. He also noted that for AY 2013-14 same issue was under consideration and a disallowance was made for the claim of provision for expected loss. Thus, assessment was completed by making the addition to the total income assessed u/s. 143(3) r.w.s. 144.
6. Aggrieved, assessee went in appeal before the Ld.CIT(A). In the first appellate proceedings, assessee explained the reasons for which it was prevented from making the submissions in the assessment proceedings since notices could not be served to it on account of change in address. It was demonstrated that the change in address was informed appropriately, yet notices were sent on the erstwhile while 6.1. Assessee also explained the merits of the case by submitting that it follows accounting standards (AS) prescribe by the Institute of the Chartered Accountants of India (ICAI). Assessee has to follow AS-7 for accounting of construction contract wherein percentage completion method is mandated. As per this accounting standard, entity is required to carry out evaluation of all on going contract in year under consideration and ascertain if any contract has incurred losses which is to be provided in the books of accounts. In compliance to the said requirement, assessee carried out the exercise and provided for expected loss in terms of AS-7. After considering the submissions made by the assessee, Ld. CIT(A) did not agree with the same and dismissed the appeal by sustaining the disallowance made by Ld.AO. Aggrieved, assessee is in appeal before the Tribunal.
Before us, Ld. Counsel for the assessee raised the legal contention to challenge the validity of reopening of the case on the issue which has already been dealt with in the course of regular assessment proceedings u/s.143(3) of the Act, tantamounting to change of opinion with no new tangible material brought on record. According to him, the reassessment proceedings and impugned reassessment order are bad in law, liable to be quashed ab initio. For this, ld. Counsel for the assessee referred to copy of order sheet entries obtained under the Right to Information Act, 2005 in respect of assessment completed u/s. 143(3) of the Act. He pointed to the entry dated 26.02.2015, wherein it is recorded that “AR submitted notes regarding loss in ONGC project”. For this he then referred to the information which was furnished vide letter dated 26.02.2015 which is duly stamped and acknowledged by the office of Ld. ACIT with the date stamp of 26.02.2015. In this submission, 7.1 The contents of this letter are reproduce as under for ready reference; “Please refer to the set of final accounts furnished and note 22.b carrying the heading “Changes in inventory of finished work in progress and stock in trade”. In the beginning of the year the work in progress stood at Rs.109472T (i.e. Rs. 109472000). This included the work done by ONGC project title as “SHP SHG Project”. This job was completed by us in the earlier year i.e. prior top 01/04/2011. As the work was not certified by the principal company, the bill was not raised and therefore the same was not constituting as sale and the amount spend on the project was included in WIP at cost without repairing to estimate any problem there on if the absence of any certificate or approval of the job. It's so happened that the said company rejected the job and because of which there was no chance of raising the bill and the management found and concluded that this amount spent cannot be simply recovered. As a result, while determining the closing WIP as on 31/03/2012, the amount of WIP was quantified by reducing the involved amount of loss. In order to place on record that the loss has incurred, the details where formatted in the schedule as above and amount was reduced while determining the net WIP. To bring home the issue clear, it is submitted that practically the WIP as on 31/03/2012 was worth Rs.1,88,80,000 and accordingly disclosed. In case, the bill was raised or amount was to be disclosed as sale then even the similar amount would have been deductible as bad debts. As far as the wording “Expected Loss” in concerned, it is terminology used by the auditor and in fact the loss was certain as claimed. The “expected” means the company was at the mercy of ONGC for any amount to be received at later date. Kind attention is further invited to the following in support of our contention that in spite of this loss, in work unbilled, the profit earned has ranged at almost same percentage as compared with immediate past year; Particulars Year ended on Year ended on 31/03/2012 31/03/2-11 Assessment Year 2012-2013 2011-12 Turnover in Rupees 108,23,09,000 121,20,65,000 Profit before all exceptional 18,49,82,000 20,52,40,000 items % of above profit to turn over 17.08% 16.93% It is irrationally hope that the explanation will be in order Das Offshore Ltd. AY 2012-13 7.2. Ld. Counsel also referred to the audited financial statement for the year under consideration to demonstrate that all the require disclosures were made in respect of the disallowance made by the Ld. AO while completing the reassessment proceedings u/s.147 of the Act. According to him, there is nothing new on record in tangible form which has been brought by the Ld. AO though the same has already been considered and accepted in the original assessment completed u/s. 143(3) of the Act. It was also asserted that the impugned reassessment has been reopened based on the additions made in the subsequent AY 2013-14 which is also on account of provision made for excepted loss pursuant to AS-7. It was stated that assessee is in appeal for AY 2013- 14 before the Ld. CIT(A) and is pending for disposal. Ld. Counsel also submitted that, the provision so made in the year under consideration which is the subject matter of appeal was reversed in AY 2014-15 and therefore, is a revenue neutral transaction. Per contra, Ld. Sr. DR placed reliance on the orders of authorities below.
We have heard both the parties and perused the material on record in respect of the legal issue raised by the Ld. Counsel challenging the validity of reassessment proceedings. It is evidently demonstrated from the order sheet entry as well as submission made by assessee in course of original assessment proceeding u/s. 143(3) of the Act whereby the issue which forms the basis for the present reassessment proceedings were examined and accepted by the Ld. AO. Further, assessee had made all the appropriate disclosures and complied with reporting requirement in its audited financial statements in terms of mandatory accounting standards which have not been controverted. Also, from the perusal of the reasons believe recorded by the Ld. AO for invoking the reopening proceedings u/s. 147 of the Act for the purpose of issuing notice u/s.148 of the Act, there is nothing Das Offshore Ltd. AY 2012-13 discernible to refer any new tangible material brought on record by the Ld. AO for invoking the said proceedings. He refers to the material already on record which has been duly examined and considered in the course of original assessment proceedings u/s. 143(3) of the Act and no adverse view taken thereon.
8.1. In the given set of facts and circumstances as evident from the corroborative material placed on record, the exercise undertaken by the Ld. AO by recording the stated reasons to believe for initiating reopening proceedings u/s.147of the Act, it is nothing, but a mere change of opinion. It is a settled position in law that the change of opinion cannot be per-sea reason to reopen. There is conceptual difference between power to review and power to reassesseee. Assessing Officer has no power to review. Reassessment has to be based on fulfilment of certain conditions and the concept of change of opinion is an inbuilt test to check abuse of power by the Ld. AO. He has the power to reopen provided there is tangible material, to come to conclusion that there is escapement of income from assessment. On this aspect of position of law, Hon’ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd. [2010] 187 taxmann.com 312 (SC) had examined the question whether change of opinion can justify reopening of an assessment. Hon’ble Court concluded that after 01.04.1989, Ld. AO has power to reopen provided there is tangible material to come to conclusion that there is escapement of income from assessment. Reasons must have live link with the formation of belief and that concept of change of opinion must be treated as inbuilt test to check abuse of power by AO.
8.2. Accordingly, in the present case, since there is no new tangible material brought on record by the Ld. AO for the purpose of invoking the reassessment proceedings and passing the reassessment order thereafter, such an exercise tantamount to change of opinion, making Das Offshore Ltd. AY 2012-13 the entire proceedings as well as the impugned reassessment order liable to be quashed. Consequently, assessee succeeds on the legal issue raised by it on the validity of impugned reassessment proceedings. Since we have held in favour of the assessee on the legal issue so raised merits of the case are not adjudicated upon, they having been rendered academic.
In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 26th June, 2025