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Income Tax Appellate Tribunal, “C” Bench, Mumbai
Before: Shri G.Manjunatha & Shri Ravish Sood
PER RAVISH SOOD, JM The present appeal filed by the revenue is directed against the order passed by the CIT(A)-22, Mumbai, dated 21.09.2016 for A.Y. 2009-10, which in turn arises from the order passed by the A.O under Sec. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (for shot „I.T Act‟), dated 29.03.2014. Further, the assessee has filed a cross objection before us. The revenue has assailed the order passed by the CIT(A) on the basis of the following grounds of appeal :
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that during the previous year relevant to the AY 2009-10 the assessee has changed the income recognition policy related to fees from Property Service Group from recognizing the entire fees from Property Service Group from recognizing the entire fees on rendering of service to recognizing the fees to the extent of invoice raised on customer, thereby non accounting of income of Rs.13,16,72,984/-. 2. The appellant craves leave to add, amend, vary omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 3. The appellant prays that the order of CIT(A) on the above ground be set- aside and that of the assessing officer be restored.” On the other hand, the assessee as a cross-objector has objected to the order of the CIT(A) on the following grounds:
“ 1. The Commissioner of Income-tax (Appeals) - 15, Mumbai (herein referred to as „CIT(A)‟) erred in upholding the action of the Deputy Commissioner of Income tax-14(2)(1), Mumbai, (herein af ter ref erred to as „AO‟) of re-opening the assessment under section 147 of the Income-tax Act, 1961 (“the Act”), thereby not appreciating the facts in the case of the Respondents. 2. The CIT(A) ought to have held that re-opening is bad in law, void-ab-initio, otherwise contrary to the provisions of the Act and hence the order passed by the AO should be quashed. The respondents crave leave to add, amend, vary, alter , omit or substitute the af oresaid grounds of cross objections or add ne w ground or grounds of cross objection at any time before or the time of hearing of the cross objections as they may be advised.”
P a g e | 3 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd.
Briefly stated, the assessee company which is engaged in the business of home finance as well as deriving income from property services had e-filed its return of income for A.Y. 2009-10 on 30.09.2009, declaring total income at Rs.145,64,43,072/-. Original assessment in the case of the assessee was framed under Sec. 143(3) on 16.12.2011, determining its total income at Rs.342,81,87,230/-. Subsequently, the case of the assessee was reopened under Sec.147 of the I.T Act. The assessee in compliance to the notice issued under Sec. 148, dated 19.03.2013 requested that its „Original‟ return of income filed under Sec. 139(1) on 31.03.2013 may be treated as the return of income filed in response to the aforementioned notice issued under Sec.148 of the IT Act.
During the course of the assessment proceedings the copy of „reasons to believe‟ on the basis of which the case was reopened under Sec.147 were made available to the assessee. On a perusal of the „reasons to believe‟, it was observed by the assessee that its case was reopened for the reason that as it had changed the income recognition policy relating to recognising the entire fees from Property Service Group on rendering of services to now recognising the fees to the extent of the invoice raised on the customers, therefore, for the said reason it had failed to recognize and account for the fees of Rs. 13,16,72,984/- on rendering of services, which though had accrued to it during the year under consideration. The objections filed by the assessee challenging the validity of the reopening of its concluded assessment under Sec.147 of the IT Act were disposed off by the A.O vide his letter dated 14.03.2014.
The assessee in the course of the assessment proceedings submitted before the A.O that earlier it used to recognise fees from
P a g e | 4 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. Property Service Group (hereinafter referred to as „PSG‟) on rendering of services i.e on booking of flats by prospective flat purchasers with its builder clients. However, if the purchase of the flat would thereafter not materialise or the deal between the prospective flat purchaser and its builder clients was terminated, no fees on account of PSG in respect of the said transaction would be payable to the assessee by its builder clients. It was submitted by the assessee that as there would be uncertainties on completion of the contracts due to processes such as legal and technical due diligence including verification of property title deeds, government land records, project plan approvals etc, therefore, receipt of the PSG fees would remain dependant on them. It was the contention of the assessee that for the delay on the part of the buyer/seller of the property, the transaction assumed to have been concluded by the assessee would in majority of cases be subsequently cancelled/reversed. Based on the aforesaid policy the fees from PSG which would have been accounted for by the assessee company in advance in the year in which the flats were booked, on the subsequent non-materialising or termination of the contracts would no more be receivable and had to be subsequently written off at a large scale by the assessee. It was submitted by the assessee that from the year under consideration viz. A.Y. 2009-10 onwards, it had recognised the fees from PSG to the extent of the invoice raised on the customers (i.e the builders) as per the Accounting Standard-9 (for short „AS-9‟) issued by the Institute of Chartered Accountant of India, as per which revenue was to be recognised only where the same was measurable at the time of rendering of the services and it would not be unreasonable to expect ultimate collection of the same. In sum and substance, it was submitted by the assessee that following the principles laid down by the AS-9 the fees from PSG was recognised from A.Y 2009-10 as revenue in instances where:
P a g e | 5 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd.
“a. Initial payments were made by prospective flat buyer to builder clients of the appellants and the said sum(s) was/were not refundable; or b. The flat purchase was completed by executing the transactions as agreed upon by the prospective flat buyer and the builder client of the appellants. In such cases the PSG fees became due and payable to the appellant by builder clients, which resulted in reasonable certainty to expect the ultimate PSG fee income.” It was further submitted by the assessee that the aforesaid basis of accounting the fees from PSG from A.Y. 2009-10 onwards was consistently followed by the assessee till date, and the same had also been accepted by the A.O in the subsequent years without any adjustments. It was thus the claim of the assessee that the change in the basis of accounting of PSG fee which was in conformity with the AS-9 was a bonafide change that was followed in the subsequent years. In nutshell, it was the claim of the assessee that the aforesaid change in the method of accounting was as a measure of prudence and following the principles of conservatism, as per which the income was not taken into account till the point of time there was a reasonable degree of certainty of its realisation, while all anticipated losses were taken into account as soon as there was a possibility, howsoever uncertain of such losses being incurred.
The A.O after deliberating on the contentions advanced by the assessee was however not persuaded to accept the same. It was observed by the A.O that the assessee company prior to A.Y. 2009-10 recognised fees from PSG on rendering of services i.e on booking of flats by the prospective flats purchasers with its builder clients, instead of on completion of rendering of services. It was noticed by the A.O that a perusal of the „notes to accounts‟ of the assesses financial statements for the year under consideration revealed that it had changed the income recognition policy relating to fees from PSG from recognising the entire fees on rendering of service i.e booking of flats
P a g e | 6 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. by the prospective buyers with its builder clients to recognising the fees to the extent of invoice raised on its builders clients, as a result whereof income of Rs.13,16,72,984/- had remained unaccounted in its books of accounts. On the basis of the aforesaid observations the A.O was of the view that as the assessee had rendered its services and income had accrued to it, therefore, the unbilled revenue of Rs.13,16,72,984/- was also required to be included in its taxable income for the year under consideration i.e. A.Y. 2009-10. In the backdrop of his aforesaid deliberations the A.O made an addition of Rs.13,16,72,984/- and assessed the total income of the assessee at Rs.167,23,73,190/-.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). Insofar the validity of the reopening of the concluded assessment that was assailed by the assessee was concerned, the same did not find favour with the CIT(A). In fact, it was observed by the CIT(A) that as the concluded assessment of the assessee was reopened vide a notice issued under Sec.148, dated 19.03.2013, which was within a period of 4 years from the end of the A.Y. 2009-10, therefore, the proviso to Sec.147 was not applicable in its case. On the basis of his aforesaid observations the CIT(A) concluded that the fact that the assessee had made full disclosure at the time of assessment under Sec.143(3) would not be a bar for reopening the said assessment. As regards the contention of the assessee that the reopening was based on a “change of opinion” as the details pertaining to revenue recognition of PSG fees were on the record of the A.O while passing the assessment order, the same too did not find favour with the appellate authority. The CIT(A) was of the view that it was not the case of the assessee that the specific issue of change in revenue recognition of PSG fees was examined and accepted by the A.O while
P a g e | 7 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. framing the original assessment. In fact, the CIT(A) observed that simply because the information regarding the change in revenue recognition formed part of the „notes to accounts‟, the assessing officer could not be said to have formed an opinion on the said count. In sum and substance, the CIT(A) held a conviction that as the A.O while framing the original assessment had not examined the aspect pertaining to change in the revenue recognition of PSG fees by the assessee, therefore, the subsequent reopening of the concluded assessment by the A.O cannot be said to be based on a “change of opinion”. Insofar the objection of the assessee that the reopening of the assessment could not be sustained as the same was based on an „audit objection‟ was concerned, it was observed by the CIT(A) that the reopening of the case on the basis of a factual error pointed out by the audit party was permissible under law. On the basis of his aforesaid deliberations the CIT(A) declined to accept the contentions advanced by the assessee that the reopening of the concluded assessment by the A.O under Sec.147 could not be sustained.
On merits, it was submitted by the assessee before the CIT(A) that the change in the accounting of fees from PSG was in conformity with the Accounting Standard-9 and was a bonafide change that was consistently followed in the subsequent years. It was further submitted by the assessee that the A.O while framing the assessments in the subsequent years had accepted the said basis of accounting of fees from PSG without carrying out any adjustments. The CIT(A) after deliberating on the contentions advanced by the assessee in context of the issue under consideration was persuaded to subscribe to the same. It was observed by him that the assessee prior to the previous year relevant to A.Y 2009-10 recognised fees from PSG on rendering of services i.e. on booking of flats by the prospective flat purchasers with
P a g e | 8 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. their builder clients, instead of recognising the same at the time of completion of the rendering of services. It was noticed by the CIT(A) that in a situation where the purchase of the flats would not materialise or stood terminated, then no fees on account of PSG would be payable to the assessee by its builder clients. The CIT(A) deliberating on the reasons leading to the change in the basis of accounting of the fees from PSG by the assessee, observed that as per the earlier method where such fees was accounted by the assessee company in advance in the year in which the flats were booked, there in a case where the contracts would not subsequently materialise or were terminated the assessee had to carry out huge write offs of the fees income pertaining to such contracts, as the same would no more be receivable either in full or in part. Apart there from, the CIT(A) was also persuaded to accept the contention of the assessee that by changing the basis of accounting of fees from PSG the assessee had brought the same in conformity with Accounting Standard-9 issued by the Institute of Chartered Accountants of India, as per which the revenue was to be recognised at the stage when the same was measurable and it would not be unreasonable to expect ultimate collection of the same. It was noticed by the CIT(A) that as per the principles laid down in AS-9, where the ability to assess the ultimate collection with reasonable certainty was lacking at the time of raising any claim, revenue recognition was postponed to the extent of uncertainty involved. On the basis of his aforesaid deliberations, it was observed by the CIT(A) that the assessee by shifting to recognising of the fees from PSG to the extent invoices were raised on its builder customers, had thus brought the same in conformity with the Accounting Standard-9 for recognition of income. In the backdrop of the aforesaid facts, it was observed by the CIT(A) that where the assessee had changed the method of recognition of income for
P a g e | 9 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. bonafide reason and the same is found to be in accordance with the normally accepted accounting practise, there would be no reason as to why such a change should not be permitted. In order to fortify his aforesaid view the CIT(A) relied on the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Modern Terry Towers Ltd. (2014) 43 taxmann.com 466 (Bom), wherein the earlier view taken by the Hon‟ble High Court in the case of Melmould Corporation Vs. CIT (1993) 202 ITR 789 (Bom) was reaffirmed. Apart there from, it was observed by him that the aforesaid recognition of fees from PSG by the assessee was well in conformity with the mercantile system of accounting, as per which an income was to be recorded as having been accrued only if there was certainty of receiving it and not when it had been waived. In support of his aforesaid view reliance was placed by him on the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. M/s Neon Solutions Pvt. ltd. (ITA No. 2251 & 2360 of 2013, dated 05.04.2016). On the basis of his aforesaid observations, it was observed by the CIT(A) that the change in the basis of revenue recognition by the assessee by considering only those income which had reasonable certainty of being collected was in conformity with the guidance notes of AS-9 issued by the Institute of Chartered Accountant of India. It was further observed by him that though the assessee was following mercantile method of accounting, the income not accounted for as per the change in the revenue recognition policy could not be said to have accrued to it. The CIT(A) observed that as the change in the recognition of PSG income was bonafide and had thereafter consistently been followed by the assessee in the subsequent years, therefore, the A.O had erred in making an addition of Rs.13,16,72,984/- on account of change in basis of revenue recognition. In the backdrop of his aforesaid deliberations the CIT(A)
P a g e | 10 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. deleted an addition of Rs.13,16,72,984/- made by the A.O and partly allowed the appeal.
As observed by us hereinabove, the revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us, therein assailing the deletion of the addition on merits. On the other hand, the assessee as a cross-objector has assailed the validity of jurisdiction assumed by the A.O for reopening its concluded assessment. The ld. Authorized Representative (for short „A.R‟) for the assessee submitted that the concluded assessment in the case of the assessee was reopened within a period of 4 years from the end of the relevant assessment year. The ld. A.R took us through the „reasons to believe‟ on the basis of which the finality of the assessment earlier framed was disturbed by the A.O. It was submitted by the ld. A.R. that the A.O had reopened the case on the basis of an „audit objection‟ received by him vide letter dated 22.12.2012 from the audit office. In order to fortify her aforesaid contention the ld. A.R drew our attention to Page 94 of the assesses paper book (for short „APB‟), wherein a copy of the objection of the audit cell was placed on record. It was submitted by the ld. A.R that the assessee had replied to the audit objection by way of an e-mail dated 16.12.2013. It was averred by the ld. A.R that the assessee had brought to the notice of the A.O that the change in the method of recognising fees from PSG was duly disclosed in the „notes to accounts‟ forming part of Schedule XV to the financial statements of the assessee for the period ending 31.03.2009. Further, it was averred by the ld. A.R that the assessee by changing the method of recognising the fees from PSG had brought the same in conformity with Accounting Standard-9 issued by the ICAI. Apart there from, it was averred by the ld. A.R that the bonafide reasons which had prompted the change in the aforementioned method of recognition of
P a g e | 11 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. PSG fee income was also submitted at length by the assessee in its aforesaid reply. It was submitted by the ld. A.R that the A.O had reopened the concluded assessment only on the basis of an „audit objection‟ and there was no application of mind on his part, which fact was clearly discernible from a bare perusal of the copy of the „reasons to believe‟. The ld. A.R took us through the „notes to the accounts‟, wherein it was duly disclosed by the assessee that the fees from PSG during the year was recognised to the extent invoices were raised on the customers. Apart there from, it was submitted by the ld. A.R that at Serial No. 2(j) of the aforesaid „notes to accounts‟, it was categorically stated that the assessee had changed the income recognition policy related to fees from PSG, as per which the fees was now recognised to the extent of invoice raised on the customers, as against the earlier method of recognising the entire fees on rendering of services. The ld. A.R took us through the relevant part of the „notes to accounts‟ and submitted that it was specifically disclosed by the assessee that in case it would have continued to use the earlier basis of recognising fees from PSG on rendering of service, then the income in the profit and loss account before taxation in the year under consideration would have been higher by Rs.13,16,72,984/-. The ld. A.R submitted that the reopening of an assessment on an issue already considered during the course of the assessment proceedings is not permissible under the eyes of law, specifically when the same facts were there before the A.O and he had considered the said issue while framing the assessment. In support of her aforesaid contention the ld. A.R relied on the judgment of the Hon‟ble High Court of Bombay in the assesses own case for A.Y. 2006-07 i.e. ICICI Home Finance Company Ltd. Vs. ACIT-10(4) (2012) 25 taxman.com 241 (Bom). The ld. A.R took us through the aforesaid judgement, wherein it was observed by the Hon‟ble High Court that the A.O cannot blindly follow the opinion of
P a g e | 12 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. the audit party for the purpose of arriving at a belief that income of the assessee had escaped assessment. In fact, it was observed by the High Court that the reason for which the assessment for A.Y. 2006-07 was sought to be reopened by a communication dated 12.10.2011 was identical to the objection of the audit authority dated 29.12.2009. In the backdrop of the said facts, it was observed by the Hon‟ble High Court that as there was no independent application of mind by the A.O before he issued the impugned notice, therefore, on the said ground alone the assumption of jurisdiction by the A.O stood faulted.
In the case before us the ld. A.R has assailed the validity of the jurisdiction assumed by the A.O for reopening of the assessment on two grounds viz. (i) that the concluded assessment had been reopened on the basis of a „change of opinion‟; and (ii) the reopening of the assessment was not on the basis of any independent formation of belief by the A.O but simply on the basis of the „audit objection‟ communicated to him. It was further submitted by the ld. A.R that the assessee had by way of „Notes‟ forming part of its accounts filed along with its return of income had at Para 2(j) duly disclosed the change in the income recognition policy related to fees from PSG. Further, the ld. A.R drew our attention to the significant accounting policies which duly revealed that the assessee from the year under consideration i.e A.Y 2009-10 had recognised the revenue from PSG fees on completion of rendering of services. It was thus the claim of the ld. A.R. that now when the complete facts on the basis of which the concluded assessment of the assessee was reopened were there before the A.O in the course of the original assessment proceedings, therefore, he stood divested of his powers to have disturbed the concluded assessment on the basis of a „change of opinion‟. In support of her aforesaid contention the ld. A.R relied on the judgment of the Hon‟ble High
P a g e | 13 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. Court of Gujarat in the case of Torrent Power of S.E.C. Ltd. Vs. ACIT (2017) 392 ITR 330 (Guj). The ld. A.R taking support of the aforesaid judgment submitted that a notice for reassessment could not be sustained solely on objections raised by the audit party. It was submitted by the ld. A.R that as the case of the assessee was reopened in the absence of any application of mind by the A.O, therefore, the reassessment proceedings were liable to be struck down on the said count itself. In order to buttress her aforesaid contention, it was submitted by the ld. A.R that as the A.O had during the course of the original assessment proceedings raised queries in respect of the variance in the amount of income disclosed in the financial statements as against that disclosed in the TDS certificates, therefore, it could safely be concluded that he had deliberated on the change in accounting for the PSG fees by the assessee during the year under consideration. In fact, as claimed by the ld. A.R the assessee had vide its letter dated 02.08.2011 explained and demonstrated before the A.O the change in the income recognition policy as was stated in the paragraphs of the „notes to accounts‟ and also reconciled its income as per the financials and the TDS certificates on the basis of which credit was claimed in the return of income. Apart there from, it was submitted by the ld. A.R that pursuant to the audit objection the assessee company had vide e-mail communications dated 08.01.2013 and 16.12.2013 justified its accounting treatment as per the prevailing accounting standards specified under the Companies Act, 1956 and the Income Tax Act, 1961. On merits, it was submitted by the ld. A.R that the assessee by adhering to AS-9 had carried out a bonafide change in respect of recognition of its revenue insofar fees from PSG was concerned. The ld. A.R submitted that as per the earlier method as per which fees from PSG was recognised at the time of rendering of services i.e. booking of flats by the prospective purchasers with their
P a g e | 14 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. builder clients, if for any reason the said agreement would not crystallise, then no fees on account of PSG in respect of the said contract would be payable to the assessee by the builder clients. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that the assessee who would have recognised the income at the time of booking of the flats would thereafter had to substantially „write off‟ the same in the year in which such agreements were terminated or did not materialise. The ld. A.R submitted that it was for the said reason that the assessee had switched over from its earlier method of recognising the fees from PSG at the time of booking of the flats by the prospective buyers, to recognising the same to the extent invoices were raised on the builder clients. It was submitted by the ld. A.R that the aforesaid change of recognising the revenue was in conformity with AS-9 issued by the Institute of Chartered Accountant of India, as per which revenue was required to be recognised as and when the same was measurable and it was not unreasonable to expect ultimate collection of the same. The ld. A.R submitted that the CIT(A) duly appreciating the facts of the case in the backdrop of the settled position of law had rightly concluded that though the assessee was following the mercantile system of accounting, however, the income not accounted for as per the change in the revenue recognition policy could not be said to have accrued to it.
Per contra, the ld. Departmental Representative (for short „D.R‟) submitted that the reopening of a case by the A.O on the basis of factual information given by the internal audit party is valid in the eyes of law. In support of his aforesaid contention the ld. D.R. relied on the order of the Hon‟ble Supreme Court in the case of CIT Vs. P.V.S. Beedies (P) Ltd. (1999) 237 ITR 13 (SC). Insofar the contention of the counsel for the assessee that the reopening of the concluded
P a g e | 15 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. assessment on the basis of a „change of opinion‟ was not permissible was concerned, it was submitted by the ld. D.R that no query was raised by the A.O in the course of the original assessment proceedings in respect of the change in the method of recognising fees from PSG by the assessee during the year under consideration was concerned. It was thus the contention of the ld. D.R that now when the A.O had not deliberated upon and formed any opinion in respect of the issue on the basis of which the case of the assessee was reopened, therefore, it was incorrect on the part of the ld. A.R to state that there was any „change of opinion‟ on the basis of which the reopening of the case had been carried out. It was submitted by the ld. D.R that the reliance placed by the counsel for the assessee on the order of the Hon‟ble High Court of Bombay in the case of ICICI Home Finance Company Ltd. Vs. ACIT, 10(1) (2012) 25 taxman.com 241 (Bom) was distinguishable on facts. The ld. D.R submitted that in the aforesaid case as the issue on the basis of which the case of the assessee was reopened had earlier been deliberated upon by the A.O while framing the original assessment, therefore, for the said reason the reopening was struck down by the Hon‟ble High Court. On merits, it was submitted by the ld. D.R that the change in the method of recognising revenue for PSG fees by the assessee during the year was not bonafide. Apart there from, it was averred by the ld. D.R. that the aforesaid change in recognising the revenue from PSG fees by the assessee did not fit in the AS-9 as was so relied upon by it. On the basis of the aforesaid contentions it was submitted by the ld. D.R that the A.O after validly reopening the case of the assessee had rightly brought the income of Rs.13,16,72,984/-of the assessee which had escaped assessment to tax in its hands.
P a g e | 16 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. 11. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. As the assessee has assailed the order of the CIT(A) on the ground that he had erred in upholding the validity of the jurisdiction assumed by the A.O for reopening its case under Sec.147 of the I.T Act, therefore, we shall first advert to the said aspect. Admittedly, the assessment in the case of the assessee company was earlier framed under Sec. 143(3), dated 16.12,2011. On the basis of an „audit objection‟, dated 22.11.2012 it was brought to the notice of the A.O that from a perusal of the „notes to accounts‟ viz. No. 2(j), as the company had changed the income recognition policy related to fees from PSG from recognising the entire fees on rendering of service to recognising the fees to the extent of invoice raised on customers, therefore, income of Rs.13,16,72,984/- which had accrued to the assessee on the services rendered had been under assessed, resulting to short levy of tax of Rs.4,47,55,648/-. As is discernible from the assessment order and also admitted before us by the ld. D.R, the A.O on the basis of the aforesaid information received from the audit section had reopened the case of the assessee after recording the „reasons to believe‟ for the year under consideration. The assessee has assailed the validity of the reopening on two grounds viz. (i) that the concluded assessment of the assessee was reopened on the basis of a „change of opinion‟; and (ii) that the A.O had reopened the concluded assessment only on the basis of the „audit objection‟ without any independent application of mind on his part.
We shall first advert to the contention advanced by the ld. A.R that the concluded assessment of the assessee had been reopened by the A.O on the basis of a „change of opinion‟. We find from a perusal of the assessment order passed by the A.O under Sec. 143(3), dated
P a g e | 17 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. 16.12.2011 that the issue as regards the change in the method of recognising the fees from PSG by the assessee during the year under consideration finds no mention in the same. Apart there from, there is neither any material available on our record, nor any such material has been placed before us by the ld. A.R in the course of hearing of the appeal, which could persuade us to conclude that the issue as regards the change in the method of recognising the PSG fees by the assessee during the year was either queried by the A.O in the course of the assessment proceedings or any such material was placed on his record by the assessee in the course of such proceedings. We though are of the considered view that in case the A.O would had deliberated on the issue under consideration in the course of the original assessment proceedings, then irrespective of the fact that there was no mention of the same in the assessment order, it would have still sufficed for concluding that the original assessment of the assessee was reopened on the basis of a „change of opinion‟ by the A.O. However, as observed by us hereinabove, as there is neither any discussion on the issue pertaining to change in the method of recognising the PSG fees by the A.O in the assessment order, nor there is any such material on the basis of which it could be safely gathered that the said issue had been looked into and deliberated upon by him in the course of the original assessment proceedings, therefore, the aforesaid contention of the assessee that its concluded assessment was reopened on the basis of a „change of opinion‟ cannot be accepted. Insofar support drawn by the ld. A.R from the relevant extracts of the letter dated 24.02.2014 that was addressed by the assessee to the A.O, therein pointing out that the then A.O in the course of original assessment proceedings had raised queries on the issue of the income disclosed by the assessee in its financial statements as against that disclosed in the TDS certificates is
P a g e | 18 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. concerned, the same in our considered view would not suffice for concluding that the A.O while framing the original assessment had deliberated upon and formed an opinion as regards the change in the method of recognising the PSG fees by the assessee during the year. In fact, in the said reply it is though stated by the assessee that it had in the course of the original assessment proceedings explained and demonstrated before the A.O the change in income recognition policy as stated in the „notes to account‟, as well as had reconciled the income as per the financials and as per the TDS certificates on the basis of which credit was claimed in its return of income, however, no such material has been placed on our record in support of the aforesaid contention. Insofar the contention of the ld. A.R that the change in the income recognition policy relating to fees from PSG was disclosed by the assessee in the „notes to accounts‟ viz. 2(j) is concerned, we are of the considered view that as per the Explanation 1 to Sec.147, even in a case where a concluded assessment is sought to be reopened after the expiry of a period of 4 years from the end of the relevant assessment year, the assessee cannot object to the reopening on the ground that as the „books of accounts‟ or other evidence from which material evidence could with due diligence have been discovered by the A.O was produced before him during the course of the original assessment proceedings, therefore, a disclosure of the material facts was made before him. In sum and substance, a mere fact that the assessee had disclosed the change in the income recognition policy related to fees from PSG in the „notes to accounts‟, the same cannot be construed as inferring formation of an opinion on the said aspect by the A.O in the course of the said original assessment proceedings. We find that as observed by the Hon‟ble Supreme Court in the case of ITO Vs. Techspan India Pvt. ltd. & Anr. (2018) 404 ITR 10 (SC), before interfering with the proposed reopening of the assessment on the
P a g e | 19 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. ground that the same is based only on a „change of opinion‟, it has to be verified whether the assessment earlier made had either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. It was observed by the Hon‟ble Apex Court that if the assessment order is non-speaking, cryptic or perfunctory in nature, it would be difficult to attribute to the assessing officer any opinion on the question that is raised in the proposed reassessment proceedings. In fact, it was observed by the Hon‟ble Apex court that every attempt to bring to tax income that has escaped assessment, cannot be absorbed by judicial intervention on an assumed „change of opinion‟ even in cases where the order of assessment does addressed itself to a given aspect sought to be examined in the reassessment proceedings. The Hon‟ble Supreme Court after referring to its earlier judgment in the case of CIT Delhi Vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC), had though reiterated the view earlier taken by the Court that a mere „change of opinion‟ cannot per se be a reason to reopen a concluded assessment, but had also stated that it has to be verified as to whether the assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which forms the basis of reopening the concluded assessment. We may herein observe that the reliance placed by the assessee on the judgment of the Hon‟ble High Court of Bombay in its own case for A.Y. 2006-07 i.e. ICICI Home Finance Company Ltd. Vs. ACIT-10(1) (2012) 25 taxman.com 241 (Bom) is distinguishable on facts. In the aforementioned case the Hon‟ble High Court had specifically observed that all the facts in respect of which the assessment was sought to be reopened were available with the A.O at the time of the assessment and the issues which were raised for reopening the assessment were specifically raised during the assessment proceedings for the said year. In fact, it
P a g e | 20 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. was observed by the Hon‟ble High Court that where facts have been viewed during the original proceedings and an assessment order has been passed, then in such a case reopening of an assessment on the same facts without anything more would be a review that would not be permitted under the garb of reassessment. It was in the backdrop of the aforesaid facts observed by the Hon‟ble High Court that as the issue on which the assessment was sought to be reopened was not only disclosed by the assessee in the „notes to accounts‟ filed with the return of income, but also specific queries in respect of the said issues was raised during the course of the assessment proceedings, therefore, there could be no reasonable basis for the A.O to have reopened the concluded assessment.
We have deliberated at length on the issue under consideration in light of the settled position of law and are unable to persuade ourselves to accept the contention of the assessee that the reopening of the concluded assessment in its case was based on a „change of opinion‟. In the backdrop of our aforesaid observations, we are of the considered view that as the issue pertaining to change in the method of recognising of fees from PSG by the assessee during the year had not been deliberated upon by the A.O in the course of the original assessment proceedings, therefore, there was no occasion for him to have formed an „opinion‟ in respect of the said issue in the course of the said proceedings, pursuant whereto the claim of the assessee that its case was reopened on the basis of a „change of opinion‟ in context of the issue under consideration, does not merit acceptance and is therefore rejected.
We shall now advert to the challenge thrown by the assessee to the validity of the reassessment proceedings on the ground that the A.O has reopened the concluded assessment on the basis of an „audit
P a g e | 21 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. objection‟, without any independent application of mind on his part. Admittedly, the concluded assessment of the assessee was reopened on the basis of an „audit objection‟, dated 22.11.2012. Insofar the contention of the assessee that a concluded assessment cannot under any circumstance be reopened on the basis of an „audit objection‟ is concerned, we are afraid that the same cannot be accepted as such. Our aforesaid view is supported by the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. P.V.S. Beedies (P) Ltd (1999) 237 ITR 13 (SC). However, in a case where the A.O had merely acted upon the information received from the audit section, without any independent application of his mind to the same, such a reopening cannot be sustained and would be liable to be vacated. Our aforesaid view is fortified by the judgment of the Hon‟ble High Court of Bombay in the assesses own case i.e. ICICI Home Finance Co. Ltd. Vs. ACIT- 10(1) (2012) 25 taxman.com 241 (Bom). In the aforementioned case the Hon‟ble High Court by relying on the judgment of the Hon‟ble Supreme Court in the case of India & Eastern Newspaper Society Vs. CIT (1979) 119 ITR 996 (SC) had observed that whether an income has escaped assessment or not must be determined by the A.O himself. It was further observed that the A.O cannot blindly follow the opinion of an audit party for the purpose of arriving at a belief that the income of the assessee has escaped assessment. In the backdrop of the aforesaid deliberations, it was observed by the Hon‟ble High Court that as in the case before them the basis on which the assessment for A.Y. 2006-07 was sought to be reopened by way of a communication dated 12.10.2011 was identical to the objection of the audit authority, dated 29.12.2009, therefore, it could safely be concluded that there was no independent application of mind by the A.O before he had issued the impugned notice. On the basis of the aforesaid observations, the
P a g e | 22 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. assumption of jurisdiction by the A.O for reopening the assessment of the assessee was vacated by the Hon‟ble High Court.
We shall now in the backdrop of the aforesaid settled position of law deliberate upon the aspect as to whether the A.O in the case before us had merely acted upon and adopted the „audit objection‟ for reopening the concluded assessment of the assessee, or had carried out an independent application of mind on the information so received before so doing. In this regard it would be relevant to look into the „audit objection‟ as was received by the A.O from the audit authority, which reads as under:
“As per provisions of Section 28(i) of the Income Tax Act, 1961 any income of any business or profession which was carried on by the assessee at anytime during the Previous year shall be chargeable to income tax under the head „Profit and gains of Business or profession‟. In the instant case assessment was complete on 16/12/2011 by computing taxable income of Rs.342,81,87,230. It was seen from the Notes to accounts (No.l(j)) that during the previous year relevant to A.Y.2009- 10 the company had changed the income recognition policy related to fees from Property Service Group from recognizing, the entire fees on rendering of service to recognizing the fees to the extent of invoice raised on customer, thereby non accounting of income of Rs.13,16,72.984. As the assessee had rendered its services and income had accrued to it, the unbilled revenue was also required to be included in the taxable income of the previous year. Failure to add back this amount resulted in under assessment of income of Rs.13,16,72,984 consequent short levy of tax of Rs.4,47,55,648. This is brought to the notice of the department for comments and necessary action. Reply may be given within three days of receipt.”
We shall now cull out the „reasons to believe‟ (as made available to the assessee by the A.O vide his letter dated 20.01.2014) on the basis of which the concluded assessment of the assessee had been reopened by the A.O, which reads as under:
“It is seen from the Notes to accounts [No.1(j)] that during the previous year relevant to A.Y. 2009-10 the company had changed the income recognition
P a g e | 23 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. policy related to fees from Property Service Group from recognising the entire fees on rendering of service to recognizing the fees to the extent of invoice raised on customer, thereby non accounting of income of Rs.13,16,72,984/-. As the assessee had rendered its services and income had accrued to it, the unbilled revenue was also required to be include in the taxable income.”
A careful perusal of the „reasons to believe‟ as had purposively been reproduced by us hereinabove, clearly reveals that the A.O had reopened the concluded assessment of the assessee by merely adopting and endorsing the „audit objection‟ as was so intimated to him by the audit section. There is in nothing discernible from the „reasons to believe‟ from where it can be concluded that there has been any independent application of mind by the A.O to the information received from the audit section for reopening the concluded assessment of the assessee. In our considered view, a bare perusal of the „reasons to believe‟ in the backdrop of the „audit objection‟ clearly reveals that the A.O had chosen to merely go by the information supplied by the audit cell, without any independent application of mind on the said information. On the basis of our aforesaid observations, it can safely be concluded that the A.O had failed to arrive at a bonafide belief which would have justified the reopening of the concluded assessment of the assessee. In fact, the revenue has failed to place on record any such material which could have persuaded us to conclude otherwise. Insofar reliance placed by the revenue on the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. P.V.S Beedies (Pvt.) Ltd. (1999) 237 ITR 13 (SC) in order to impress upon us that the reopening of a case on the basis of factual information given by internal audit party was valid in law is concerned, we find that the said judgment is distinguishable on facts. In the said judgment the Hon‟ble Apex Court had observed that the factual information provided by the audit party was to be treated as information within the meaning of Sec.147(b) and reopening on the
P a g e | 24 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. said basis is permissible under law. We may herein observe that the issue before us is not as to whether the information received by the A.O from the audit party is to be treated as information within the meaning of Sec.147(b) or not, but the issue herein involved is as to whether the A.O without applying his independent mind to the information so received from the audit party can reopen a concluded assessment on the basis of the borrowed satisfaction of the „audit party‟, or not. As observed by us at length hereinabove, now when there is no independent application of mind by the A.O on the information received from the audit party, therefore, it can safely be concluded that in the absence of a bonafide belief arrived at by the A.O on the basis of information intimated to him by the audit party that the income of the assessee chargeable to tax pursuant to change in the method of recognising the fees from PSG had resulted to escapement of its income chargeable to tax, the same could not have been validly reopened by him. We thus finding ourselves to be in agreement with the aforesaid contention of the ld. A.R that as there is no independent application of mind on the part of the A.O who had merely acted upon the audit objection so received, the reopening of the concluded assessment of the assessee cannot be upheld and is liable to be vacated on the said ground.
We shall for the sake of completeness now advert to the merits of the case. The revenue has assailed the order of the CIT(A) on the ground that he has erred in vacating the addition of Rs.13,16,72,984/- made by the A.O on account of failure on the part of the assessee to account for its fees from PSG to the said extent, specifically when the same had accrued to it. As observed by us hereinabove, the assessee had during the year changed its method of recognising the fees from PSG from the earlier method of recognising
P a g e | 25 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. the same at the time of rendering of services i.e booking of flats by the buyers with its builder clients. As per the revised policy the assessee company now recognised the fees to the extent of invoice raised on the customer, as against the earlier method of recognising the entire fees on the rendering of the services. In order to appreciate the facts in the true perspective, it would be relevant to understand the business model of the assessee. The assessee is in receipt of PSG fee income on the following services provided by it :-
“The appellants assists the owner/landlord/lessors of property in identifying tenants under a lease agreement/leave and license arrangement. In the aforesaid transaction, the Appellant‟s PSG fee income is equivalent to two months of the effective rentals of the property. The rent of the property is agreed between the landlord and the tenant. The appellants assists its clients i.e. Builders, owner of the property etc., in identifying the prospective purchaser of the flat/property. In such transactions, the Appellant‟s PSG fees income does not exceed 2% of the total purchase value of the residential flat/property.” The assessee prior to the previous year relevant to the assessment year 2009-10 recognised the fees from PSG on rendering of services i.e. on booking of flats by the prospective flat purchasers with their clients i.e. the builders, instead of on completion of the rendering of services. In a situation where the purchase of flat would not materialise or stood terminated, no PSG fee pertaining to the said contract would be receivable by the assessee from its builder client. On the basis of the aforesaid earlier method of recognising the fees from PSG in advance by the assessee in the year in which the flats were booked, if property transaction between the prospective flat purchaser and the builder would thereafter not materialise and stand cancelled/reversed, then the assessee who would had already accounted the PSG fee pertaining to the said transaction in its „books of accounts‟, had to „write off‟ the said income to the extent the same would not be receivable in full or in part. In the backdrop of the
P a g e | 26 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. aforesaid bottlenecks in recognising the correct income, the assessee brought the same in conformity with AS-9 issued by the Institute of Chartered Accountants of India, as per which the revenue was to be recognized at the stage of rendering of services, subject to the condition that the same at the said point of time was measurable and could reasonably be expected to be ultimately collected. On the basis of the said change in the method of recognizing the fees from PSG, the same would now be recognised by the assessee to the extent of invoice that would be raised on its builder clients.
We have perused the order of the CIT(A) and are in agreement with the view taken by him that as the change in the method of recognizing the fees from PSG by the assessee during the year was a bonafide change, which thereafter had consistently been followed in the subsequent years, therefore, no adverse inferences on account of such change in the method of accounting was liable to be drawn in the hands of the assessee. In our considered view, the assessee by changing the basis of revenue recognition had brought the same in conformity with the guidance notes of AS-9 issued by the Institute of Chartered Accountants of India, as per which the revenue is required to be recognized at the stage when the same is measurable and canreasonably be expected to be ultimately collected. In fact, as per the principles laid down in AS-9, where the ability to assess the ultimate collection with reasonable certainty was lacking at the time of raising any claim, revenue recognition was postponed to the extent of uncertainty involved. We find that from the year under consideration viz. A.Y 2009-10, the assessee had started recognizing the fees from PSG to the extent invoice was raised on the customers (i.e the builders) as per AS-9. We are persuaded to subscribe to the contentions advanced by the Ld. A.R that as per the past method of
P a g e | 27 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. recognizing fees from PSG by the assessee i.e. on booking of flats by the prospective flat purchasers with their clients (i.e. the builders), instead of on completion of the rendering of services, the true income of the assessee would not be reflected. As deliberated by us at length hereinabove, in a case where the purchase of flat would either not materialize or stood terminated, no fees on account of PSG in respect of such contract would be receivable by the assessee from its builder clients, as a result whereof the assessee would have to „write off‟ the receivables in its „books of accounts‟. Be that as it may, the aforesaid bonafide change in the method of recognizing the fees from PSG by the assessee from the year under consideration onwards had brought the same in conformity with AS-9, which had resulted into facilitating the accounting of its true income during a year. In our considered view now when the change in the method of accounting by the assessee is a bonafide change, which thereafter had been consistently followed by it in the subsequent years, therefore, no addition could have been made by the A.O on account of such change in the method of recognizing the fees from PSG by the assessee. Our aforesaid view is fortified by the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Modern Terry Towers Ltd. (2014) 43 Taxmann.com 466 (Bom), wherein the Hon‟ble High Court had reaffirmed its earlier view taken in the case of Melmould Corporation Vs. CIT (1993) 202 ITR 789 (Bom), wherein it was held as under :
“Whenever there is a change in the method of valuation, there in bound to be sum distortion in calculating the profit in the year in which change takes place. But if change is brought about bonafide and is accordance with the normally accepted accounting practice, there is no reason why such a change should not be permitted.” Apart there from, we find that as observed by the CIT(A) even in the case of an assessee following mercantile system of accounting, an item would be regarded as accrued income only if there was certainty of
P a g e | 28 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd. receiving it and not when it had been waived. We find that a coordinate bench of the Tribunal viz. ITAT, Hyderabad in the case of Addl. CIT Vs. Hill County Properties Ltd. (2015) 57 Taxmann.com 400 (Hyd), had after deliberating on somewhat similar facts as are involved in the case of the assessee before us, observed that where some extraordinary events created uncertainty with regard to completion of project by the assessee, which resulted in cancellation of property booking/filing of legal cases, the assessee who was a property developer was justified in changing the method of recognition of income and adopting registration of agreement for sale or handing over of possession of flats and bungalows as the basis for recognition of income, as against execution of agreement for sale that was adopted in the earlier years. On the basis of our aforesaid observations, we find no infirmity in the order of the CIT(A) who in our considered view had rightly deleted the addition of Rs. 13,16,72,984/- made by the A.O on account of change in the basis of revenue recognition of fees from PSG by the assessee during the year under consideration.
The appeal of the revenue is dismissed and the cross objections filed by the assessee are partly allowed in terms of our aforesaid observations.
Order pronounced in the open court on 03.04.2019 Sd/- Sd/- (G. Manjunatha) (Ravish Sood) Accountant Member Judicial Member भ ुंफई Mumbai; ददन ुंक 03.04.2019 Ps. Rohit
P a g e | 29 ITA No.7223/Mum/2016 A.Y. 2009-10 C.O No.81/Mum/2018 DCIT Vs. M/s ICICI Home Finance Co. Ltd.
आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : अऩीर थी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आम क्त(अऩीर) / The CIT(A)- 3. 4. आमकय आम क्त / CIT 5. विब गीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भ ुंफई / DR, ITAT, Mumbai ग र्ड प ईर / Guard file. 6. सत्म वऩत प्रतत //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीऱीय अधिकरण, भ ुंफई / ITAT, Mumbai*