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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: Shri Mahavir Singh, & Shri Ashwani Taneja
आदेश / O R D E R
Per Ashwani Taneja, A.M: This appeal has been filed by the revenue against the order of Commissioner of Income Tax (Appeals)-20 Mumbai [in short ‘CIT(A)’], dated 9.6.2014 passed against assessment order u/s 143(3) read with section 147 of the Income Tax Act, dated 13.12.2013 for assessment year 2008-09 on the following grounds:- “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in quashing the notice issued u/s-158 when provisions for issue of notice were complied with and reasons for re-opening was recorded by the A.O.? Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that the reassessment processing u/s 147/148 of the Income-Tax Act, 1961 was bad in law, by holding it to be based 2 M/S. NESCO LTD. on a change of opinion without appreciating the fact that no informed decision was taken by the A.O. due to failure on part of the assessee to disclose truly and fully all material facts for making the assessment? Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in allowing the compensation of Rs.6.50 crores holding that the same was an ascertained liability, without appreciating the fact that the same was only a provision and allowing a provision from the income of the assessee will give a distorted picture of the Profit & Loss account of the assessee? The appellant prays that the order of the Ld. CIT(A) be set aside on the grounds mentioned above and that of the A.O. be restored. The appellant craves leave to add, amend or alter all or any of the grounds of appeal
”.
2. During the course of hearing, it was argued by the Ld. DR that assessee had claimed in the profit & loss account an aggregate amount of Rs.6.50 crore on account of compensation payable to various parties. Since, the amount of compensation payable was not at all crystalized, therefore, the reopening was done to examine the correctness of the claim and disallowance was made, since the claim was found to be not correct in the reassessment proceedings. Therefore, order of the AO should be upheld and appeal of the revenue should be allowed.
3. Per contra, Ld. Counsel of the assessee made detailed submissions in support of the order passed by the Ld. CIT(A). It was submitted that reopening has been done by the AO in absence of any fresh tangible material, the requisite details were submitted to the AO in the original assessment proceedings u/s 143(3), which were examined by him and claim was found to correct, as per law, therefore, no disallowance was made therein. Thus, reopening is beyond the provisions of law. It was further submitted by him that Ld. CIT(A) has also examined six issues on the merits and found that claim has been rightly allowed by Ld. CIT(A). Therefore, viewed from any angle, the order passed by the AO is not tenable in law 3 M/S. NESCO LTD. and incorrect on facts thus, order of CIT(A) should be upheld and appeal filed by revenue should be dismissed.
4. In re-joinder, the Ld. DR submitted that Ld. CIT(A) has omitted to consider the effect of in Explanation 1 to section 147 which says that mere production before the AO of books and other evidences will not necessarily amount to disclosure stipulated u/s 147 Act.
5. We have gone through the submissions made by both the parties and the order passed by the Ld. CIT(A). It is noted that the assessment proceedings in this case were originally completed u/s143(3) of the Act vide order passed on 27.12.2010 and the AO recorded ‘Reasons’ dated 28.3.13 (i.e. within 4 years from the end of the relevant assessment year) before issuing notice u/s148, which are reproduced here under:- “Under the provisions of the Income Tax Act, 1961 any provision made in the books of contingent liability is not allowable as expenses while computing income under the head business or profession. In this case the assessee company filed its return of income for the A.Y. 2008-09 on 06.10.2008 declaring income of Rs. 46,83,63,270/-. The assessment has been completed after scrutiny on 27.12.2010 by computing income of Rs.46,52,72,576/-. On perusal of records it was observed that the assessee company debited Rs.6,50,00,000/-as claim for compensation paid/provided. Further it was stated in para no.15(a) schedule 13 to notes forming part of the accounts that provision for compensation pending settlement as on 31 03 2008 was Rs.131000000/-(including the PY 31.03.2008). However, the provision made in the accounts is remained Lobe added back to the total income. In view of the above facts, I have reason to believe that income of Rs.6,50,00,000/-chargeable to tax has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961."
4 M/S. NESCO LTD.
With the assistance of the parties, it was noted by us that assessee had placed before AO during the course of original proceedings, details about amount of compensation debited in the profit & loss account for aggregate amount of Rs.6.50 crores. The assessee had submitted party wise details, giving justification for allowability of compensation with respect to each party which was shown in subsequent year. The amount of compensation was paid as and when settled by the Civil Courts and the amount not paid was written back as part of other income. It is noted that no fresh tangible material has come into possession of the Assessing Officer, before recording the aforesaid reasons for doubting the allowability of impugned amount of claim Ld. AO has made reference of the same documents which were held on record of the Assessing Officer, for example, para 15(A) of scheduled 13 to the notes forming part of the balance-sheet. In our view, the same balance-sheet which was filed before the AO cannot be referred to for making the sole basis for reopening the already concluded the assessment. In addition to that, we have examined the aforesaid note no-15(a) of scheduled no 13. Perusal of the same does not lead to any clear belief that these amounts are not allowable and remains to be added back to the total income of assessee. The said interference has been drawn by the AO of his own. Thus, in our opinion there is no fresh tangible material in the possession of the AO on the basis of which, a belief could be formed for escapement of income.
Ld. DR made reference to Explanation 1 of section 147 to submit that the reopening made by the AO on the ground that as per Explanation 1, mere production of the evidences would not necessarily amount to disclosure. We have considered the argument of Ld. DR and also gone through the Explanation 1 to section 147 which reads as under:-
5 M/S. NESCO LTD. “Production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso”.
We have considered and understood the correct position of law in this regard. Firstly, the Explanation is mainly to define the scope of First proviso to section 147 which postulates limitation of reopening in case reopening is done beyond 4 years from the end of relevant assessment year. The said proviso cannot be made applicable here to examine the validity or otherwise of the reopening done by the Assessing Officer. Secondly, in any case, otherwise also, the said Explanation can be taken help of by the AO when he has firstly demonstrated that reopening has been done on the fulfilment of the foremost mandatory condition viz, availability of fresh tangible material in the possession of the AO to enable him to form the belief of escapement of income and justify the reopening of the assessment. The said mandatory element is found missing here, as discussed above. The undisputed fact is that there is no fresh tangible material in the possession of the AO to form belief of escapement of income. Under the circumstances, it would not be possible for the AO to take shelter of the protection provided in Explanation 1 to section 147. Thirdly, the real intent of this Explanation seems to be to protect those cases where the proper information was not provided by the assessee during the course of original assessment proceedings or it was provided in such a manner which was not possible to be examined by the AO in the peculiar facts and circumstances of a particular case. It may also provide protection in those cases where the issue was not examined at all by the AO as there was no occasion with the AO to examine the issue under consideration. However, in the case before us, the impugned issue was 6 M/S. NESCO LTD.
examined by the AO in view of the query asked by him and the same was properly replied with proper details and thereafter only original assessment u/s 143(3) was passed accepting the impugned claim. Thus, in our considered opinion, the AO does not have the shield of Explanation 1 of section 147 to justify the reopening which has been done without there being any fresh tangible material in the possession of the AO.
We find that Ld. CIT(A) has rightly quashed the reopening done by the AO by observing as under:- “I have circumspected the entire spectrum of the facts and'- circumstances of the case and have also considered carefully the finding of the Assessing Officer, rival submission of the AR and have also considered the various judicial propositions referred to or relevant to the issue under appeal. I find that Ld. Assessing Officer has wrongly initiated escapement assessment proceeding without "tangible" or "fresh material" or on the basis of any material which suggest that there is escapement of assessment. Appellant by letter dated 27.10.2010 appearing at page No.36 of the paper book, has submitted the details of compensation debited in profit & loss account during the original assessment proceedings and party-wise ascertained liability was explained to the Assessing Officer. The Xerox copy of clarification given to the Assessing Officer has also been submitted in the paper book page No.41, reveals the fact that issue under consideration was well within the knowledge of the original Assessing Officer who was of the rank of Addl.CIT, Rg.9(2) whereas present Assessing Officer is the DCIT below his rank. It is very evident that after receipt of explanation and details submitted by the appellant, the then Assessing Officer had passed order after two months, i.e on 27.12.2010. It is also important to point out that after scrutinizing the details of expenses, the first Assessing Officer has disallowed some expenditure u/s.37 out of miscellaneous expenditure. The details of miscellaneous expenditure were also submitted by the same letter dt. 27. 10. 2010 which means the issue of claim of compensation was very much in the notice of the original Assessing Officer who has accepted the claim of the appellant.
7 M/S. NESCO LTD. Thus it is very evident that subsequent to the original assessment, there was no any new material, fresh tangible material or any new information which could suggest escapement assessment, therefore, I find force in the argument of the Ld.AR that no such completed assessment could be re- opened. Thus the proceeding itself is null and void. Further, it is noticed from the letter dt.05.12.2013 that appellant has clarified to the Assessing Officer that the claim of compensation has been examined twice and therefore there is no scope under the law to re-examine or review third time the same with sole intention to disallow such genuine claim merely by adopting different view on the same set of facts. Such review or change of opinion cannot be basis for reopening the completed assessment. Thus the stand of the Assessing Officer is not justified nor is maintainable in view of amended provision of law u/s.147 of the I.T. Act, 1961 and CBDT Circular No549 dt.31.10.2009. Thus the of the appellant is found acceptable. It is important to note that statement notice has been issued for virtually same reason for which rectification proceedings had been initiated but dropped. Assessing Officer has not received any new material thereafter, hence such notice cannot be held as valid vide decision of Hon'ble Kolkata High Court in the case Berger Paints India Ltd vs ACIT (2010) 322 ITR 369, 381 (Kolkata). Further, I find that there is no allegations recorded in the notice u/s.148 by the Assessing Officer that appellant had failed to make full and true disclosure of the relevant facts. Since, initiation of proceeding is based on change of opinion or by reviewing the original order, such notice cannot be held validly issued vide decision of Hon'ble Jurisdictional High Court in the case of Arthur Anderson & Company vs. ACIT (2010) 324 ITR 240, 246 (Bom). Also reference may be had of D.T. & T.D.C. Ltd. vs. ACIT (2010) 324 ITR 234, 239 (Delhi). Further, the Hon'ble Supreme Court has disapproved such action of the Assessing Officer in the case of CIT vs. Kelvinator of India Ltd (2010) 320 ITR 561 (SC) Further, the Hon'ble jurisdictional High Court has also not sustained such reopening of the completed assessment and therefore the decision in the case of Direct Information Pvt.Ltd vs. ITO (2012) 349 ITR 150 (Bom), is applicable to the case under appeal Recently, Hon'ble 8 M/S. NESCO LTD.
Delhi High Court in the case of Bharat Sanchar Nigam vs. CIT (2013) 355 ITR 188 (Del) has held that no such case can be reopened on the basis of change of opinion or without having fresh tangible material before initiating reopening proceeding. Further, the Hon'ble Delhi High Court (Full Bench), in the case of CIT vs. Kalvinator of India Ltd. 256 ITR 1 (Delhi), at para 12 to 15 has held as under :- "We may also notice that a Division Bench of the Gujarat High Court in Garden Silk Mills (P) Ltd. (supra), while expressing similar views observed- "The reasons recorded by the AO which led to the belief about the escapement of assessment disclose that the present case is nothing but mere change of opinion on the facts which were already before the AO while making the first assessment to which conscious application of mind is reflected from the proceedings, and allowed in the computation and which has not been disputed by the Revenue." Although the referring Bench had prima facie agreed with the decision of this Court in Jindal Photo Films (supra) but a doubt was sought to be raised by the Revenue in view of a decision of the Gujarat High Court in Praful Chunilal Patel's case (supra). Therefore, let us now consider the decision of the Division Bench of Gujarat High Court in the said case, where it was held: "It will thus, be seen that in the proceedings taken u/s- 147, the AO may make an assessment or reassessment or recomputation, as the case may be. The word 'assess' refers to a situation where the assessment was not made in the normal manner while the word 'reassess' refers to a situation where an assessment is already made, but it is sought to be reassessed on the basis of this provision. In cases where the AO has not made an assessment of any item of income chargeable to tax while passing the assessment order in the relevant assessment year, it cannot be said that such income was subjected to an assessment. In the assessment proceedings, the AO would ascertain on consideration of all relevant circumstances the amount of tax chargeable to a given taxpayer. The word 'assessment' would mean the ascertainment of the amount of taxable income and of the tax payable thereon In other words, where there is not of the amount of taxable income and the tax payable thereon, it 9 M/S. NESCO LTD. can never be said that such income merely because during the assessment proceedings the relevant material was on record or could a diligence discerned by the AC for the purpose of assessing a particular item of income chargeable to tax, it cannot be inferred that the AO must necessarily have deliberated over it he had formed any opinion in respect thereof. If looking back it appears to the AO, (within (our years of the end of the relevant assessment year) that a particular item even though reflected on the record was not subjected to assessment and was left out while working out the taxable income and the tax payable thereon, i.e. while making the final assessment order, that would enable him to initiate the proceedings irrespective of the question of non-disclosure of material facts by the assessee. We are, with respect, unable to subscribe to the afore- mentioned view. If the contention of the Revenue is accepted the same, in our opinion, would confer an arbitrary power upon the AO. The AO who had passed the order of assessment or even his successor officer only on slightest pretext or otherwise would be entitled to reopen the proceeding. Assessment proceedings may be furthermore reopened more than once. it is now trite that where two interpretations are possible, that which fulfils the purpose and object of the Act should be preferred. It is well settled principle of interpretation of statute that entire statute should be read as a whole and the same has to be considered thereafter chapter by chapter and then section and ultimately word by word. It is not in dispute that the AO does not have any jurisdiction to review its own order. His jurisdiction is confined only to rectification of mistake as contained in s. 154 of the Act. The power of rectification of mistake conferred upon the ITO is circumscribed by the provisions of S. 154 of the Act. The said power can be exercised when mistake is apparent. Even mistake cannot be rectified where it may be a mere possible view or where the issues are debatable. Even the Tribunal it as limited jurisdiction under s. 254(2) of the Act. Thus, when the AO or Tribunal Has considered the matter in detail and view taken is a possible view the order cannot be changed by way of exercising the jurisdiction of rectification of mistake.
10 M/S. NESCO LTD. It is a well settled principle of law that what cannot be done directly cannot be done indirectly. If the ITO does not possess the power of review, It cannot be permitted to achieve the said object by taking recourse to initiating a proceeding of reassessment or by way of rectification of mistake. In a case of nature the Revenue is not without remedy. Sec. 263 of the Act empowers the CIT to review an order which is prejudicial to the Revenue”.
We find that order passed by Ld. CIT(A) deserves to be upheld on the issue of reopening in view of the detailed discussion made by us in earlier part of the order.
With regard to merits of the case also it is noted by us that Ld. CIT(A) upheld that validity of the claim made by the assessee by observing as under:- “On merit also, though not require to deal with because of above finding, there is no case for the Assessing Officer to disallow the genuine claim on the basis of presumption or on account of wrong notion of contingent liability. It is very evident from the details submitted by the appellant by letter dt.27.10.2010 that such liabilities were not a general liability but were having specific background of dispute between assesse and the purchasing parties and service provider. With a view to make it more evident it seems necessary to briefly highlight the facts of the compensation so that there would not he any sort of ambiguity or lack of clarity. The amount of claim of compensation of Rs.6,50,00,000/- comprises of Rs.4 Crores related to dispute with Macedon Indo Austrian Ventures Pvt. Ltd., Rs.2.02 crores related to Western Railway Mumbai and Rs. 49.50 lacs related to Shivangi Crafts Kashipur. It can be seen from Page No.41 of the paper book and from the complaint No.CA51/2000 of 1999-2000 that appellant has supplied machines which was having manufacturing defects, hence, production was not coming out properly and therefore thereafter dispute aroused with the assessee hence that Austrian Company had filed this complaint before Monopolies. Trade Practices Commission New Delhi. Considering the treatment appellant has made necessary provision. And 11 M/S. NESCO LTD.
thereafter has provided in books of account, the quantum of compensation which is Rs.4crores in this year. This ascertainment is also based on Senior Legal Manager's letter dated 30.03.2008. Similarly, the compensation of Rs.2.02 crores (together with chargeable interest) shown in the name of Western Railway, Mumbai is based on letter No.W.580/2/6 Vol. V dated 29.01.2008 of Sr. Divisional Engineering (South) Western Railway, Central Mumbai 400 008. Similarly, compensation of Rs.49.50 lacs (together with interest) is in respect of complaint filed by Shivangi Craft Ltd. Case No.1453 of 2000 on the ground that appellant has not manufactured and supplied the textile machinery inspite of accepting the order dated 19.10.1997 and receipt of advance of Rs.20 lacs. The revision petition filed by the appellant in the High Court of Bombay has been dismissed vide criminal miscellaneous petition No.164 of 2002, order dated 11.12.2007. Thus, subsequent to the decision of Hon'ble High Court, appellant was under obligation to make provision of actual liability. The actual working has been given by Sr. Legal Manager vide his letter dated 30.03.2008, hence the entire amount of Rs.6,50,00,000/- is found to be based on actual occurrence of financial incidence purely related to business activities. That is why first Assessing Officer has not made any addition of this claim of compensation on the basis of provision. It is also pertinent to mention that during the course of escapement assessment proceeding also appellant by letter dated 12.11.2013 has clarified to the Assessing Officer that such claim has been made as per the accounting practice and principle followed since several years and is continue, therefore, the accrued or recognized liability provided as per the accounting standards prescribed by ICAI, cannot be discarded. As per Accounting Standard-1 (AS-I) it is mandatory to make provision for known liability and losses even though no amount is determined with certainty but could be genuinely estimated on the basis of reliable information. Such liability as mention hereinabove has been accrued, hence is allowable. Reference may be had of the case of Calcutta Company Ltd. vs. CIT (1959) 37 ITR 1 (SC). It is also a fact that if any liability is reduced and earlier claim was on higher side, appellant is to offer as income in the year of finality. This practice is visible 12 M/S. NESCO LTD. from the evidences on record, hence, the bonafide claim of the appellant is to be the year of claim and same cannot be deferred to be allowed year. Thus, in the background of facts and circumstances of the case and in the light of the above discussion, I reach to the conclusion that neither notice u/s148 was valid nor disallowance of allowed compensation has been made on any sound ground or with legal authority, hence, disallowance of expenditure of Rs.6,50,00,000/- is deleted”.
We have already discussed in detail in earlier part of our order about the correctness of the claim made by assessee. It is noted by us that the findings recorded by the Ld. CIT(A) are well reasoned and factually correct. Nothing wrong has been pointed out therein by Ld. DR, therefore, same are upheld on reopening as well as on merits.
As a result, appeal filed by revenue is dismissed and order passed by the Ld. CIT(A) is upheld. Order was pronounced in the open court at the conclusion of hearing.