AURO GOLD JEWELLERY P.LTD,MUMBAI vs. DCIT CEN CIR 5(2), MUMBAI

The first issue in this appeal of assessee is against the order of the AO reopening the assessment under section 147 r.w.s 148 of the Act and confirmed by CIT(A) without appreciating that the reopening was carried out beyond four years from the end of the assessment year and original assessment year completed under section 143(3) of the Act and all the material facts for computing correct income were fully and truly disclosed by the assessee. For this assessee has raised the following ground No. 1: -

Briefly stated facts are that the assessee company is engaged in the business of manufacturing and trading of gold, jewellery, bullion and diamonds. A search and seizure action was carried out on the business and residential premises of the assessee under section 132 of the Act by the Department on 25.09.2008, whereby various documents as well as hard disks of the computer were found and seized. The assessee filed its return of income for the relevant AY 2009-10 on 29.09.2010 along with audited annual report, tax audited report in form No. 3CA and 3CD and 3 statutory audit report under the companies Act 1956. Original assessment was completed by the AO under section 143(3) read with section 153A of the Act by making various additions to the return income of the assessee. Subsequently, the assessment was reopened by issuing notice under section 148 of the Act dated 12.02.2015. In response to notice under section 148 of the Act, the assessee filed a letter to the AO objecting to the reopening of assessment vide letter dated 07.12.2015. The AO also supplied copy of reasons recorded vide letter dated 31.08.2015 and the reasons recorded read as under: - “In the instant case, a search action under section 132 of the income tax act, 1961 was conducted on 25/09/2008 and consequently assessments were completed under section 143(3) for AY 09-10 on 31.12.2010. It has been observed that the assessee operates Margin Trading Facility Account in Derivative Segment. Realized Margin Trading Facility Account is credited to profit and loss account at regular basis. However in respect of Unrealized Margin Trading Facility Account the accounting policy employed has been found to be inconsistent. The assessee used to carry the Unrealized Margin Trading Facility Account to the balance sheet till AY 2006-07 and it was not credited to P&L a/c. During year 2007-08 the accounting policy was changed and Unrealized Margin Trading Facility Account was credited to 4 P&L a/c instead of taking it to the balance sheet. During AY 2009-10 again, the accounting policy in respect of Unrealized Margin Trading Facility Account has been changed and it was credited to the profit and loss account and due to the chinge in accounting policy the profit for the year has been reduced by an amount of Rs 5,33,79,948/- as stated in the schedule K to the accounts for the year 2008-09. However, as seen from the clause 11(b) of Tax Audit report the tax auditor has started that there was no change in the method of accounting employed vis a vis the method employed In the immediately preceding previous year. Thus, the statement of the tax auditor is not in conformity with the accounting policy as stated in schedule K to the annual account. Since, the assessee does not follow any accounting policy consistently, the amount of Rs 5,33,79,948/- should be added back.

The AO framed the reassessment under section 143(3) read with section 147 of the Act and made addition on account of unrealized margin trading profit on account of change in accounting policy and assessing the income amounting to Rs. 5,33,79,948/-. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) confirmed the action of the AO reopening of assessment by observing in Para 4.3.1 as under: - “4.3.1 I have considered the submissions of the appellant and perused the materials available on record. The issue for adjudication is whether the A.O. was justified in reopening the assessment u/s.147 of the Act beyond four years of the end of the relevant A.Y. and whether, while doing so, he had complied with the terms of the first proviso to section 147. It is a matter of record that the assessment of the appellant was completed u/s.143(3) of the Act on 31.12.2010. Thereafter, on scrutiny of the record, it was noticed that the appellant had entered into forward exchange contracts purportedly to cover its exposure in foreign currency. It was also noticed that the appellant had changed the accounting policy in respect of unrealized margin trading facility account in derivative segment during the relevant period 7 and due to the change in the accounting policy, the profit for the year had been reduced by an amount of Rs.5,33,79,948/- as stated in the Schedule ‘K' to the accounts for the F.Y.2008- 09. It was also noticed that the appellant had not been following a consistent policy in regard to the unrealized margin trading facility account. Till A.Y.200607. The appellant used to carry unrealized margin trading facility account to the balance sheet rather than the P & L Account. During A.Y.2007-08, the accounting policy was changed by the appellant and the unrealized margin trading facility account was credited to the P & L Account and not taken to the balance sheet. However, while computing business profit, the same was reduced from the profit as per P & L Account. During AY 2009-10 again, the accounting policy in respect of unrealized margin trading facility account was changed and the loss of Rs.5,33,79,948/- on open contracts in foreign currency was not only charged to the P & L Account but also claimed as deduction which resulted in reducing the business profit for the relevant period. It was also noticed that the tax auditor in clause 11(b) of the tax audit report (Form 3CD) had stated that there was no change in the method of accounting employed vis-a-vis the method employed in the 8 immediately preceding previous year. This clearly shows that the reopening of assessment was based not on subjective opinion or suspicion of the AO but on discovery of the fresh material on scrutiny of the case records of the appellant. The belief entertained by the A.O. was that of an honest and reasonable person based upon reasonable grounds. It is well accepted that fresh or tangible material for the purpose of re-assessment may not be alien to the record.”

Aggrieved, now assessee is in appeal against confirmation for reopening of assessment. Before us, the learned Counsel for the assessee argued that the original assessment was completed under section 143(3) of the Act vide order dated 31.12.2010. Notice under section 148 of the Act was issued vide dated 12.02.2015. The reopening is beyond four years. It was argued by the learned Counsel that the assessee’s case falls under the proviso to section 147 of the Act. For this, the learned Counsel for the assessee argued that the entire facts relating to accounting policy for unrealized margin trading profit, which is patently correct because for the assessment year 2009-10 till date, the assessee has consistently followed the same policy and accounting practice. Hence, there is no change in policy till AY 2008-09 as alleged by AO in the reasons recorded. It was stated that the change in accounting policy was only once, which is from AY 2009-10 and same continued to be followed thereafter. The learned Counsel for the assessee explained before us that for AY 2006-07, assessee’s accounting policy was not to 9 account gain/loss on the profit arising out of purchase and sale on the date of Balance sheet.

On the other hand, the learned Sr. DR relied on the re-assessment order and the order of CIT(A) and argued that reopening is on reasons recorded after formation of reasonable belief by the AO.

We have heard the rival contentions and gone through the facts and circumstances of the case. We noted from the facts that for FY 2006- 07 the assessee’s accounting policy was not to account gain/ loss on the open contract of purchase and sales on the date of balance sheet. The assessee changed the system of accounting of gain in A.Y.2007-08 and accordingly, accounted gain in the book of account. However while computing business profits, the same was reduced from P& L account. Therefore, for the purpose of computing business profit, there is no change as compared to A.Y.2006-07. To prove this the assessee produced the return of income for AY 2007-08 before the AO. The assessee followed this policy in A.Y.2008-09 as in A.Y.2006-07. Hence for A.Y. 2006-07, 2007-08, and 2008-09 assessee consistently followed the same policy for computing business profits. There were two views prevailing during the period 01.04.2005 to 31.03.2008, for the purpose of computing business profit. During F.Y.2008-09, the assessee under impression that department is of the view that the open contract should be valued as on the date of balance sheet and gain/loss should be accounted in P&L Account. Hence, in this A.Y.2009-10 the assessee changed the policy and accounted gain/loss in the Profit and loss account. Therefore the assessee has disclosed all the material facts for the assessment fully and truly.