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Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM
आदेश / O R D E R Per Dr. A. L. Saini:
The captioned appeal filed by the assessee, pertaining to assessment year 2006-07, is directed against the order passed by the Commissioner of Income Tax (Appeal)-XXXVI, Kolkata in appeal no. 558/CIT(A)-XXXVI/Kol/Wd-1(2), HG/10-11, which in turn arises out of an assessment order passed by the Assessing Officer u/s 147 / 144 of the Income Tax Act, 1961 (in short the ‘Act’) dated 15/12/2010.
The assessee is a partnership firm and is engaged in the business of construction of buildings etc. The assessment year under consideration i.e. AY 2006-2007 was the first assessment year. The firm audited its accounts and submitted its Income Tax Return AY 2006-2007 on 07.12.2006 along with Tax Audit Report declaring
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 a total loss of Rs.1,64,558/-. The firm had declared a turnover of Rs.61,74,765/- from construction contract business.
The solitary grievance of the assessee in this appeal is that re-assessment proceedings initiated by the AO under section 147/148 is bad in law.
In the assessment order which was made u/s 147 / 144 of the IT Act196l dated 15.12.2010 made by the ITO Ward 1(2) Hooghly it has been stated that at the time of issue of processing of return and issue of refund certain discrepancies were noticed and for the same a notice was issued u/s 148 of the IT Act 1961. The case was reopened u/s147 of the IT Act 1961 after recording the following reasons which is recorded in the order of the Ld. CIT Appeal on Page 5/6: "The assessee firm Arti Engineering & Construction Co. - in the return of income filed for the assessment year 06-07 had shown the income from contractual business for Rs.(-) 1,64,558/ -. On the top of the return filed in ITS-2D-signed by Prabir Ghosh - it is written –1st year. In the Part B point 7(b) of the Form 3CD being signed by the auditor it is also evident that this was the first year of operation. The major points of observation in the annexure filed with the audit report by the assessee reads as follows: Particulars Asst. Year 2006-07 Asst. Year 2005- 06 Paid up share capital 1417266.54 Nil Secured Loans 301981.00 Nil Current Liabilities 678031.33 Nil Total of balance sheet 2397278.87 Nil Gross turnover 6174765.00 Nil Depreciation 78226.00 Nil
It is observed that the assessee, being a contractor ought to have followed the accounting standard-7, which was not adopted in order to deduce the real profit of the accounting year. Barring the project completion method where revenue is recognized on completion of the project only, the assessee have adopted percentage completion of the method but without offering so much of the profit earned during the gear as bears Page | 2
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 to the whole profit conceivable from the project the same proportion as the expenses incurred bears to the total cost of the project. Moreover, it is found from the P&L account that a sum of Rs. 10,96,677/- had been envisaged as expenditure to have been incurred as 'Hydra Rent (Orissa). This expenditure together with that of Rs.9,71,401/-towards the head shown as 'sub- contractor payment', forms a part of the inadmissible category of expenditure u/s.40(a)(ia) of the IT Act. From the accounts and the documents accompanied therewith it is understood that the deviation from complying with the provision will lead to disallowance of such expenditure. The accounts have been incorrectly completed leading to escapement of income from the TDS certificate (Form16A) it is evident that the total amount credited/paid to the assessee by 'Bhusan Steel & Strips Ltd., Dhenkanal(Orissa) was for Rs.53,26,614/ - on which the assessee had claimed a "TDS for Rs. 1,19,769/-. In the balance sheet filed the assessee had shown sundry debtors forRs.11,73,000/-. On summation of such credited amount and the debtor amount the turnover ought to have beenRs.64,99,614/-, whereas the assessee had shownRs.61,74,765/- as the turnover. Thus there is a clear escapement of receipts which was not reflected in the P&L accounts this being the first year of business. These specifications are arrived at from the material for the belief i.e. return of income and the accompanying documents filed with such return. Thus, there exists circumstances and there is a nexus between the material on record and the belief held to arrive of an opinion that income had escaped assessment. For the reasons specified above there is course of justification to know that income had escaped assessment and there is reason to believe that income had escaped assessment. The aforesaid reasons are recorded before initiation of the proceedings as u/s. 147 of the IT Act, 1961.”
The Assessing Officer then assessed the income of the firm at Rs.38,50,630/- i.e. making an addition of Rs. 40,15,188/- The breakup of the addition are as follows: (a) Partners Capital Rs. 14,17,966/- (b) Disallowance u/s 40(a)(ia) Rs. 20,69,078/- (c) Turnover difference Rs. 3,24,849/- (d) 40A(3) disallowance Rs. 1,53,796/-
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 (e) Partners remuneration disallowed Rs. 49,500/-
Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the ld CIT(A), who has confirmed the addition made by assessing officer. Aggrieved, the assessee is in appeal before us.
7.Ld Counsel for the assessee reiterated the submissions made before the authorities below, whereas ld DR relied on the assessment order passed by the AO.
We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. First of all we shall examine and analyse the reasons recorded by the assessing officer as follows:
We note that the reasons recorded contain the following basis for reopening: (a) Reason-1:The assessee has not adopted AS-7 hence real profit not deduced. (b) Raason-2: The assessee has applied percentage completion method (c) Reason-3: The profit offered by the assessee is not much. (d) Reason-4: TDS was not deducted on sum of Rs. 10,96,677/- being rent of Hydra Machinery. (e) Reason-5: TDS certificate issued by Bhusan Steel Strips Ltd. shows turnover of Rs. 53,26,614/- and assessee has shown debtor of Rs.11,73,000/- and therefore total turnover by adding both this comes to Rs. 64,99,616/- while the turnover disclosed by the assessee was Rs. 61,74,765/-. Based on these 5 reasons the assessing officer came to be conclusion that there is escapement of income.
About reason 1 and 2 of reopening, we note that none of the reasons have any basis or material link to come to the conclusion of escapement of income. The AO himself in the reasons has admitted that the assessee was following percentage of completion method. As per AS-7, the revenue recognition should be done as per percentage of completion method which as per the AO himself the same was Page | 4
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 followed by the assessee, thus this reasons is therefore non-existent and does not survive as there is no material basis to come to such conclusion of escapement of income. Further no addition on this account was made in the assessment order.
About Reason-3, we note that the assessee did not offer much profit from the contract. This itself is a wild allegation based on conjectures and summarizes. There is no basis / material on the record for the assessing officer to come to the conclusion that the profit was shown less by the assessee. Thus this reason is also non-existent and does not survive as there is no material basis to come to such conclusion of escapement of income. Further no addition on this account was made in the assessment order.
About Reason-4, we note that with respect to the issue of TDS not deducted on hydra machine rent payment of Rs.10,96,677/- and Rs.9,71,401/-. We note that the audited accounts and the tax audit report on page 7 where the auditor has stated that the assessee has deducted tax and deposited the same as per law. At the time of reopening before the Assessing Officer only the copy of tax audit report was available and hence that was the only material on record. In the audit report there was no qualification of non deduction of TDS and therefore at the time of reasons recording there was nothing before the Assessing Officer to come to the conclusion that the assessee had not deducted the TDS on rent. Thus the reasons recorded had no material having live link to the escapement of income. Even with respect to sub contractor payment, the TDS is applicable only if the payment exceeds a particular amount per person in a year. On the fact of the material before the Assessing Officer at the time of reopening i.e. that the Income Tax Return and Tax Audit Report there was nothing to lead the Assessing Officer to conclude that the sub contract payment was paid to only one person and or that no TDS was deducted thereon. In the audit report there was no qualification of non deduction of TDS and therefore at the time of reasons recording there was nothing before the Assessing Officer to come to the conclusion that the assessee had not deducted the TDS on rent. Thus the reasons recorded had no material having live link to the escapement of income. Page | 5
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 The ld Counsel submits that till 13.07.2006 the definition of rent is as follows: (i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee;’
The scope of the definition of Rent was enhanced by the Taxation Laws (Amendment) Act, 2006, w.e.f.13.07.2006 as follows: “[(i) "rent" means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any - (a) land; or (b) building (including factory building); or (c) land appurtenant to a building (including factory building); or (d)machinery; or (e) plant; or (f) equipment; or (g) furniture; or (h) fittings, Whether or not any or all of the above are owned by the payee;]
Therefore till 12.07.2006 there was no requirement to deduct TDS on rent on machinery. The Assessment Year in the assessee`s case is Assessment Year 2006-07 which is year ended 31.03.2006 and thus on that date there was no obligation to deduct TDS and as a corollary there was no disallowance u/s 40(a)(ia) of the IT Act, 1961. Thus, this reason is also non-existent and does not survive as there is no material basis to come to such conclusion of escapement of income.
About Reasons 5, We note that TDS certificate issued by Bhushan Steel Strips Ltd. shows turnover of Rs. 53,26,614/- and assessee has shown debtor of Rs. 11,73,000/- and therefore total turnover by adding both this comes to Rs. 64,99,614/- (Rs. 53,26,614-Rs. 11,73,000) which the turnover disclosed by the assessee was Rs. 61,74,765/-.
This reasons recorded by AO is based on surmise and conjecture. If the turnover as per TDS certificate issued by Bhushan Steel Strips Ltd. was Rs. 53,26,614/- and the turnover declared by the assessee was Rs. 61,74,765/-, then there is no material to conclude that the amount of Rs. 61,74,765/- did not include this amount of Rs. Page | 6
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 53,26,614/-. The Assessing Officer has totally confused accounting with turnover computation. If there is a debtor in the balance sheet of Rs. 11,73,000/- how does it increase turnover. In fact, the recorded debtor in the books is nothing but part of the turnover recorded in the books for which payment is yet to be received. Thus the disclosed debtor figure in balance sheet recorded in the books cannot be added with the disclosed turnover to hold that such turnover is out of books. Thus, this reason is also non-existent and does not survive as there is no material basis to come to such conclusion of escapement of income.
Thus, we note that there was no material to provide live link to the escapement of income available before the assessing officer to conclude that there was escapement of income thus the entire reopening was bad in law and hence the assessment order deserves to be quashed.
We note that the items listed in the reasons were either not added by the AO to the income of the assessee in reassessment proceedings or on merits it has been demonstrated that the same cannot be added and therefore once the items for which reasons have been recorded are not added or held to be not assessable then no other item of income can be added in such proceedings. The reasons as recorded itself alone without taking any assistance to any other documents or affidavits etc must be able to make out a case for valid reopening and if not then the entire reopening would fail. For that we rely on the judgment of the Hon`ble Bombay High Court in the case of Hindustan lever Ltd. v. R.B. Wadkar, ACIT (2004) 268 ITR 332:137 479 (Bom.), wherein it was held that reopening notice has to be justified on the basis of reasons recorded at the time of issuing the impugned notice. The impugned notice must stand or fail on the reasons recorded. These reasons recorded cannot be supplemented by further reasons or by filing an affidavit and/or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the court, on the strength of affidavit or oral submissions advanced. The reasons are a manifestation of the mind of the Assessing Officer and must justified on the basis of inferences or interpretation. The reasons as recorded prime facie do Page | 7
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 not seem to indicate reasonable belief that income chargeable to tax has escaped assessment. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer .No substitution or deletion is permissible. No additions can be made to those reasons. Thus, in Hindustan Lever Limited v. R.B. Wadkar, ACIT(2OO4) 268 ITR 332 (Bom.) (supra), a Division Bench has opined the followings with respect to recording of reasons which should form the unimpeachable code for the Assessing Officers:
(1). The reasons are required to be read as they were recorded by the Assessing Officer;
(2). No substitution or deletion is permissible;
(3). No additions can be made to those reasons;
(4). It is for the Assessing Officer to disclose and open his mind through reasons recorded by him,
(5). It is for the Assessing Officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year,
(6). The reasons recorded should be clear and unambiguous and should not suffer from any vagueness;
(7). The reasons recorded should be self explanatory and should not keep the assessee guessing for the reasons;
(8). Reasons provide the link between conclusion and evidence;
(9). The reasons must be based on evidence;
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 (10). The Assessing Officer, in the event of challenge to the reasons must be able to justify the same based on material available on record;
(11). He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence;
(12). That vital link is the safeguard against arbitrary reopening of the concluded assessment;
We note that if the recorded reasons shout contradiction and inconsistency it means necessary satisfaction in terms of the statutory provision has not been recorded at all. The AO was not competent to continue with the proceeding under section 147 on some other issues or grounds which were not mentioned in the reasons recorded under section 148(2). A plain reading of Explanation (3) to Sec. 147 shows that for the purpose of reassessment u/s 147 the AO can reassess income in receipt of an issue which escaped assessments and such other income which comes to his notice subsequently in the course of proceedings under the said section even though the reasons for such issue/income were not included in the recorded reasons. The explanation (3) however pre-supposes that the issue with reference to which the reason was recorded, was found to be legally & judicially tenable and with reference thereto the AO is able to prove that income had indeed escaped assessment. It is only when the AO is able to establish valid initiation of reassessment proceedings with reference to the recorded reasons and in the reassessment u/s 147; such income is also assessed; only then the AO will be able to be expand the scope of reassessment proceedings by assessing any other escaped income which comes to his notice in the course of reassessment. If on the other hand, the AO is not able to justify the reopening of a concluded assessment with reference to reasons recorded u/s148(2) or where on examination of assessee's submissions AO agrees that on the basis of reasons recorded it cannot be held that income had escaped assessment within the meaning of Sec. 147 then in such an event the very reopening of a concluded assessment stands vitiated and Page | 9
M/s Arati Engineering & Construction Co. ITA No.2152/Kol/2014 Assessment Year:2006-07 therefore the AO cannot expand the scope of reassessment by including some more issues or reasons which did not find mention in the reasons recorded u/s148(2). For that we rely on the judgment of the Hon`ble Bombay High Court in the case of CIT Vs Jet Airways India Ltd (331 ITR 236).
In view of the facts narrated above and the binding precedents applicable to the facts, we are of the view that the reasons recorded are bad in law therefore we quash the reassessment order passed by AO under section 147/148 of the Act.
In the result, the appeal of the assessee is allowed. Order pronounced in the Court on 22.11.2019
Sd/- Sd/- (S.S.GODARA) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक/ Date: 22/11/2019 (SB, Sr.PS)
Copy of the order forwarded to: 1. M/s Arati Engineering & Construction Co. 2. ITO, Ward-1(2), Hooghly 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. 6. Guard File.