YES BANK LTD,MUMBAI vs. DCIT 7(3), MUMBAI

आयकर अपीलीय अिधकरण, मुंबई “ “ “ “ जी जी जी” खंडपीठ जी Income-tax Appellate Tribunal -“G”Bench Mumbai सव�ी सव�ी सव�ी राजे�� सव�ी राजे�� राजे��,लेखा राजे�� लेखा लेखा सद�य लेखा सद�य सद�य एवं सद�य एवं एवं, राम लाल नेगी एवं राम लाल नेगी राम लाल नेगी, �याियक राम लाल नेगी �याियक �याियक सद�य �याियक सद�य सद�य सद�य Before S/Shri Rajendra,Accountant Member and Ram Lal Negi,Judicial Member आयकर आयकर अपील अपील संसंसंसं./ITA/1991/Mum/2015,िनधा�रण िनधा�रण वष� वष� /Assessment Years: 2008-09 आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� Yes Bank Limited DCIT, -8(3)(2) 9th Floor, Nehru Centre, discovery Room No.615, 6th Floor, Aayakar Vs. of India Bldg., Dr. A.B. Road, Worli Bhavan, M.K. Marg, New Marine Lines Mumbai-400 018. Mumbai-400 020. PAN:AAACY 2068 D (अपीलाथ� /Appellant) (��यथ� / Respondent) आयकर आयकर अपील अपील संसंसंसं./ITA/2021/Mum/2015,िनधा�रण िनधा�रण वष� वष� /Assessment Years: 2008-09 आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� DCIT, -8(3)(2) Vs. Yes Bank Limited Mumbai-400 020. Mumbai-400 018. (अपीलाथ� /Appellant) (��यथ� / Respondent) Revenue by: Ms. Vidisha Kalra-DR Assessee by: Ms. Krupa Gandhi and Shri Nimesh Jain-AR सुनवाई क� तारीख / Date of Hearing: 18.08.2016 घोषणा क� तारीख / Date of Pronouncement:24.08.2016 आयकर अिधिनयम अिधिनयम,1961 क� क� धारा धारा 254(1)केकेकेके अ�तग�त अ�तग�त आदेश आदेश आयकर आयकर आयकर अिधिनयम अिधिनयम क� क� धारा धारा अ�तग�त अ�तग�त आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dated 30.12.14 of CIT(A)-14, Mumbai the assessee and the Assessing Officer (AO)have filed cross appeals for the year under consideration.Assessee -Bank filed its return of income on 29.09.2008 declaring income of Rs.320.87 crores. The original assess -ment u/s.143(3) was completed on 15.11.2010 determining income of the assessee at Rs. 337.70 crores.Later on a notice u/s.148. dt. 5.03.2013 was issued to the assessee. The AO completed the assessmnet u/s.143(3) r.w.s. 147 of the Act on 17.02.14, assessing the income of the assessee at Rs.342.91 crores. ITA/1991/Mum/2015 (Assessee’s Appeal): 2.First Ground of appeal is about re-opening. In response to notice u/s.148, the assessee had filed return of income on 07.10.2013.It made a request to the AO to provide it the copy of reason recorded.The reasons recorded by him for reopening the assessment read as under: “In this case it is found that assessing officer determined assessed income of Rs. 3,37,70, 08,315/-after disallowance of Provision on investment, under section 14A and disallowance u/s. 35D. Audit scrutiny of computation of income revealed that assessee has claimed deduction u/s. 36(l)(viia) for an amount of Rs. 200734588/- and the same as allowed by the department as given below. A.Y.2008-09 A.Y.2007-08 A.Y.2006-07 General loan loss provision 179594700 254229012 72962742 (i.e., Provision for standard

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asset/advances as per RBI Guidelines) …. A Provision for NPA …. B 21139888 Nil Nil Total Provisions (C)=A+B 200734588 254229012 72962742 Total income before 3409899537 16822358394 831125223 deduction … D 7.5% 255742465 226176880 62334392 Deduction u/s.36(1)(viia) 200734588 126176880 62334392 lower C and D

It would be seen from the above that assessee is regularly creating provision for standard assets and advances (see note forming part of the accounts 18.4.3) under the head General loan loss provision excluding Provision for NPA and claiming 36(1)(viia) on that from that last three assessment years. Thus assessee banking company is simply pulling aside money by creating provision for standard asset/advances to meet unascertained liability that may become expenditure on the happening of an event in future (last three years not bad debts) which is inadmissible deduction and contradictory to the CBDT's instruction. (2) It was also noticed from the relevant records of assessment year 2008-09 that assessing officer determined assessed income of Rs.3377008315/-, after disallowance of Provision on investment of Rs.13,31,60,503/- under section 14A of Rs. 22,02,363/- and disallowance under section 35D of Rs.3,28,92,000/- Assessing Officer has already discussed the matter regarding disallowance under section 35D and stated that Assessee Company is engaged in finance business and is not an industrial undertaking. Thus, entire deduction claimed by banking company u/s. 35D is not in order. Audit scrutiny of attachment IV of 3CD audit report revealed that assessee had claimed following expenditure for deduction u/s.35D. i) Preliminary & Pre-incorporation expenses - Rs.5677691/- ii) Share issue expenses - Rs.32892000/- However,while determining the assessed income, Assessing Officer disallowed only Rs.3,28, 92,000/- in respect of share issue expenses and Preliminary expense of Rs.5677691/- has not added back to the income. Therefore, I have reason to believe that the income of the assessee chargeable to tax, has escaped assessment/or A.Y. 2008-09. Notice u/s./48 is separately issued.” After getting the copy of the reasons, the assessee vide its letter dated 25/10/ 2013 raised objections against the notice issued u/s. 148.The AO passed an order and rejected the objections raised by it vide order dated 30.12.13.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).Before him,it was argued that during the original assessment proc -eedings,the AO had asked the assessee to furnish details of outstanding balance of provision for bad and doubtful debts created u/s.36(1)(viia),that he had formed an opinion about the allowability of the item, that the assessee had also furnished submission with regard to claim made u/s. 35D of the Act, that the deduction claimed in computation of income was part of the notes forming part of return of income, that the reopening was based on change of

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opinion,thus reassessment on mere change of opinion was bad in law,that the re-opening was based on audit report. It relied upon the cases of Kelvinator India Ltd.(320ITR561), Foramer France (264/566),Rao Thakur Narayan Singh(56/234), Garden Silk Mills (222/68). 3.1.After considering the submission of the assessee and the order of the AO,the FAA held that the balance sheet showed other liabilities in Schedule-5,that as per details of said Schedule-5 provisions,subordinated debt and provision for standard advances were shown under the head ‘Others’ at pg-10,that it had made provisions as per guidelines issued by RBI, that provisions made by assessee fell in the category of provisions for investment/standard advances provision for non performing assets, that those provisions had been made as per RBI guidelines by crediting the amount during the year, that as per provisions of section 36 (1) (viia) the provision for bad and doubtful debts was required to be created from AY.2000- 01 to 2004-05 only,that the provisions of section 36(1)(viia)were applicable for only rural branches of the bank,that the assessee had created provisions for year under appeal only, that the claim made by it under head provision for bad and doubtful debt amounting to Rs.17.94 crores was not supported in the absence of any account in the nomenclature (i) “provision for bad and doubtful debts”, that the provision made by the assessee had nothing to do with the section 36(1)(viia),that in the computation of income claim made by assessee for provisions created u/s. 36(1)(viia) were disallowed in toto and only bad debts were reduced,that the claim of the assessee, not being in accordance with the provisions of section 36 (1)(viia) was not found supported,that the assessee had disallowed provisions for non performing advances /general loans/provisions, that the claim made by assessee for deduction of expenditure at 7.5% of income could not be allowed, that there was no account in name of ‘provision for bad and doubtful debt’ credited during the period relevant to assessment year 2000-01 to 2004-05, that it could not take excuse that material were disclosed fully

4.Before us,the Authorised Representative ( AR) stated that reopening of assessment for the year under consideration was based on mere change of opinion and was bad in law, that the assessment was reopened under section 147 of the Act without any new tangible material, that the re-opening was bad in law as the same was based on an audit objection, that reopening was not justified as same was revenue neutral. She relied upon the cases of kelvinator of India Ltd.(320ITR561); Prima Paper & Engineering Industry (364ITR222); NDT Systems (363ITR603); Amitabh Bachhan (349ITR76); Heavy Metal and Tubes Ltd. (364ITR609); India & Eastern Newspaper Society (119ITR996); DRM Enterprises (230 taxman 61); ICICI Home Finance Co.Ltd. (210 Taxman 67); Excel Industries Ltd.(358 ITR 3

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295)and Glaxo Smithkline Asia(195taxman35).She also referred to the page No.63, 137, 138, 112,113 of paper book . The Departmental Representative (DR) stated that it was not a case of change of opinion, that there were no bad debts,that assessee was not operating in the rural areas, that bad debts had to be written off as irrecoverable as per the provisions of the Act, that the bank had followed the RBI Guidelines,that there was no bar in the Act for not relying upon the audit objections, audit objection was one of the sources of reopening the escaped income.She referred to the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (291ITR500).

5.Before proceeding further,we would like to deliberate upon the validity of audit objections in re-opening of assessments.In our opinion,the part of the note of an audit party,which mentions the law that escaped the notice of the AO constitutes "information" and the part which emboides the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the AO.A completed scrutiny assessment should not be disturbed in a light manner.If an audit objection points out some mistake in the original order provisions of section 154 have to be invoked and not of section 147.Both the sections find place in the Act for specific purposes.Similarly,if the order passed by an AO is found to be erroneous and prejudicial to the interest of Revenue,a notice u/s.148 should not be issued. Section 147 is not panacea for all the ills.We would like to discuss the limitations of an audit objection in subsequent parargraphs.But,at present it is sufficient to say that re-opening should be done only in certain circumstances,as envisaged by the section.

5.1.First of all,we would like to refer to the cases that deal with audit objections and validity of re-opening of assessments on the basis of such objections.In the case of Aroni Commerci- als Ltd.(362ITR403)the Hon’ble Bombay High Court has held as under: The primary requirement to reopen any assessment is a reason to believe that income chargeable to tax has escaped assessment. The reason should be based on tangible material. Tangible material would mean factual material and not inference or opinion on material already in existence and considered during the assessment proceedings.Once a query is raised during the original assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is not necessary that the assessment order should contain reference or discussion to disclose his satisfaction in respect of the query raised.(emphasis supplied)

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Though the principle of res judicata is not applicable to tax matters as each year is separate and distinct, nevertheless where facts are identical from year to year, there has to be uniformity and consistency in treatment.” In the case of P.C.Patel & Co.(379 ITR 151)the Hon’ble Gujarat High Court has dealt the issue of audit objections as follow: “Information given by the audit party or an audit objection can be used for the purpose of reopening of the assessment.However, for that there must be formation of opinion by the Assessing Officer or the Assessing Officer independently must have reason to believe that the income chargeable to tax has escaped assessment.” “…… from the correspondence between the AO and the higher authority showed that though the AO maintained that the audit objection raised by the audit party was not correct,however as the amount involved was very high as mentioned by the audit party and to safeguard the interests of the Revenue and the guidelines issued the reassessment proceedings have been initiated. Therefore, the formation of the opinion by the AO that the income chargeable to tax had escaped assessment was vitiated the reopening of the assessment could not be sustained and deserved to be quashed and set aside.” Now,we would like to refer to Xerox Modicorp Ltd.(350 ITR 308) of the Hon’ble Delhi High Court.In that matter the following reasons were recorded by the AO for re-opening the case: "The assessment of M/s. Xerox India Ltd. for the AY.2004-05 was completed u/s. 143(3), vide order dated Decem ber 27, 2006, determining an income of Rs.27,39,40,490. 2.The assessee-company had claimed and was allowed an expenditure of Rs. 3,79,50,791 on account of royalty paid to a foreign company in foreign exchange in lieu of rendering technical assistance. Since this expenditure has provided the assessee a benefit of enduring nature, this expenditure ought to have been treated as capital expenditure." It was contended before the Court that once an assessment was completed u/s.143(3) of the Act,the AO was presumed to have applied his mind to all the issues and he could not thereafter reopen the assessment on the ground that he did not form any opinion with respect to any particular issue;he must have tangible material before him on the basis of which he can entertain a reason to believe that income chargeable to tax has escaped assessment that there was no reference to any tangible material in the reasons recorded and that all that was stated therein was that the expenditure by way of royalty conferred an enduring benefit to the assessee and ought to have,therefore, been disallowed as capital expenditure,that it was nothing but a change of opinion without any tangible material coming to the possession of the AO subsequent to the completion of the original assessment.The Hon’ble Court held as under:

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“……..the assessing authority cannot keep improving his case from time to time and that the reassessment proceedings have to stand or fall on the basis of what was stated in the reasons recorded u/s. 148(2) of the Income-tax Act, 1961, and nothing more. No failure to furnish full and true particulars relating to the royalty payments, including the failure to file the relevant agreements, had been alleged in the reasons recorded. If anything, the reasons are an admission that it was the AO who did not draw the inference that the royalty payments were capital in nature. It was for him to draw the appropriate inference and not for the assessee to tell him what inference of fact or law should be drawn from the primary facts furnished. ......... ............ Moreover, it was not for the assessee to advise the AO as to what inference he should draw as to the nature of the expenditure-whether it is revenue or capital. The audit objection was an inference that the royalty payment resulted in a capital benefit ; such an opinion expressed by the audit could not constitute tangible material on the basis of which the assessment could be reopened. Therefore, the notice within the period of four years from the end of the AY.2004-05 was not valid. “17.It is difficult to sustain the notice issued u/s. 148. The audit objection is only an inference that the royalty payment resulted in a capital benefit ;such an opinion expressed by the audit cannot constitute tangible material on the basis of which the assessment can be reopened.” In the case of Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC),the Supreme Court expressed the view that information as to correct legal position must come from a formal source or body which is competent to pronounce upon the issue and that the Revenue audit is not competent to pronounce on issues of law. There is no averment that the Revenue audit only pointed out to any factual aspect or material or primary fact that was omitted to be disclosed by the petitioner. 20. In the light of the foregoing, we are of the view that the notice issued u/s. 148 for the AY.2004-05 is also without jurisdiction. The same is quashed as also the consequent proceedings.” Next is the case of Gujarat Fluoro Chemicals Ltd.(353 ITR 398),decided by the Hon’ble Gujarat High Court.In that matter,the assessee had filed its original return of income on declaring a total income of Rs.23,75,74,840/-.The return was selected for scrutiny.The AO framed assessment u/s.143(3) of the Act computing the total income of the assessee at Rs. 26,01,66,900/-.Later on,the AO issued a notice on to reopen the assessment of the petitioner.At the request of the petitioner,reasons for reopening were supplied.The assessee , under communication,dated 24/12/2004,raised detailed objections to such reopening of assess -ment.Primarily the contention of the assessee was that all the three grounds on which the AO desired to reopen the assessment were examined in the original scrutiny assessment and

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that,therefore, reopening on such basis was not permissible.Such objections were rejected by the AO.At that stage, the assessee filed the petition before the Hon’ble Court,challenging the notice for reopening of assessment itself.Allowing the petition,the Court held as under: “Though an audit objection may serve as information, on the basis of which the Income-tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the Income-tax Officer on his own.........” “....it was contended on behalf of the assessee that the AO held no independent belief that income chargeable to tax had escaped assessment. He submitted that the AO was under compulsion by the audit party to issue notice for reopening of assessment though she herself held a firm belief that no income had escaped assessment. The AO in her affidavit did not deny this. In the affidavit what was vaguely stated was that the Department was apprehensive about the source of information on the basis of which such averments were made. Inter-departmental correspondence was strictly confidential. On a direction from the court the Revenue made a candid statement that the file containing exchanges between the AO and the audit party was not traceable. The Revenue not having either denied the clear averments of the assessee made in the petition on oath nor having produced the original files to demonstrate the independent formation of opinion by the AO though sufficient time was made available,the issue stood firmly concluded in favour of the assessee. The reassessment notice was not valid.” In the case of IOT Infrastructure and Energy Services Ltd.(332 ITR 587),the Hon’ble Bombay High Court has also dealt the similar issue.Facts of the case were that in its balance sheet as of 31.03.2004,the assessee made a provision for diminution in the value of assets of Rs. 1.41 crores under the head of operating and other expenses.In item 17 of the tax audit report u/s. 44AB,the assessee disclosed that an amount of Rs. 1.12 crores was a write down in the value of assets and that this excluded an amount of Rs.29.23 lakhs which was a write down in the value of slow/non moving inventory valued at estimated realizable value being considered as not in the nature of capital expenditure.The AO reopened the assessment on the ground that the assessee had debited a provision amounting to Rs. 1.41 crores on account of diminution in the value of assets which in his view was not a proper charge on profits as the amount represented a provision made for a fall in the value of capital assets, which was considered to be capital in nature. The assessee in its objections drew the attention of the AO to the fact that in the statement of total income, it had already added back the amount of Rs. 1.12 crores and that the balance of Rs.29.23 lakhs related to a write down in value on account of slow or non-moving inventory estimated on the basis of realizable value which could not be regarded as being in the nature of capital expenditure.The AO accepted that the amount of

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Rs. 1.12 crores out of Rs.1.41 crores had been disallowed by the assessee in the return of income. However, he treated the balance of Rs. 29.23 lakhs to be of a capital nature without dealing with the objection of the assessee that a write down in the value of slow moving or non-moving inventory could not be treated as of a capital nature.On a writ petition the Hon’ble Court allowed the petition and held that the reopening of the assessment was not valid.The Court observed as under: “It is now a settled position of law that though, after April 1, 1989, the power to reopen an assessment is much wider than previously, the words “reason to believe” do not confer an arbitrary power upon the AO to reopen an assessment merely on the basis of a change of opinion.The AO must possess tangible material to come to the conclusion that there is an escapement of income from assessment. The validity of a notice of the AO seeking to reopen an assessment would have to be determined on the law as it prevailed on the date of the notice reopening of the assessment and has to be assessed with reference to the reasons recorded by the Assessing Officer. (i)admittedly, of the amount of Rs. 1.41 crores,the assessee had disallowed an amount of Rs. 1.12 crores in the computation of income and this had been accepted by the AO in his order. That being the position, there could have been no occasion for the AO to form a reason to believe that this part of the income (Rs. 1.12 crores) had escaped assessment. (ii) the assessee in item 17(a) of the tax audit report clearly stated that the balance of Rs.29.23 lakhs was a write down in the value of slow/non-moving inventory which was valued at its estimated realizable value and which was not in the nature of capital expenditure. In its objections, the assessee clarified that a write down in the value of inventory could never be regarded as of capital nature. The AO did not deal with the submission of the assessee while disposing of the objections. As a matter of fact, in his response to the audit objection he AO had stated, as regards the amount of Rs. 29.23 lakhs, that it was mentioned in item 17 of the audit report that the estimated realizable value of the inventory was considered “not in the nature of capital expenditure”. In the circumstances, the reopening of the assessment was not founded on tangible material and the AO had acted outside the fold of his jurisdiction. Now,we would refer to the judgment of Transworld International Inc.(273 ITR 242),of the Hon’ble Delhi High Court.Facts of the case were that the petitioner,a non-resident foreign company,was engaged in the business of producing television programmes primarily of sport activities.For the AY.1997-98 a return of income u/s. 139(1) of the Act was filed declaring an income of Rs.95,59,750/- wherein a claim was made for depreciation @ 25%,amounting to Rs.1,36,00,682/- on plant and machinery valued at Rs.5,44,02,729/-. The return of income

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was processed u/s. 143(1)(a) of the Act. Various notices were issued and queries were raised during the course of assessment proceedings.According to the petitioner all the material facts necessary for assessment were disclosed fully and truly.All the queries were answered and necessary information called for was furnished for the purpose of determining the total income.The AO made an order u/s. 143(3) of the Act, and determined the total income of the assessee at Rs.99,83,740/-.A tax-depreciation-schedule had been filed showing details of depreciation claimed. The plant and machinery included one OB van. Subsequently an audit objection was raised to the grant of full depreciation. A notice of reassessment was issued there upon.On a writ petition,against the notice and reassessment proceedings ,the Hon’ble Court held as under: “The validity of initiation of reassessment proceedings has to be judged with regard to the material available with the authority at the point of time of issuing the notice u/s. 148 of the Income-tax Act, 1961. When the assessee has disclosed fully and truly all material facts necessary for the assessment and on the basis of which the assessment is made, then exercise of powers u/s. 148 of the Act contemplates that : (a) there must be material for the belief regarding escape of income from taxation ; (b) circumstances must exist and cannot be deemed to exist for arriving at an opinion ; (c) reasons to believe must be honest and not based on suspicion, gossip, rumour or conjecture ; (d) reasons referred to must disclose the process of reasoning by which the AO holds “reasons to believe” and change of opinion does not confer jurisdiction to reassess ; (e) there must be nexus between material and belief ; and (f) reasons recorded must show application of mind by the Assessing Officer. Where an assessment has been made and there is purported excessive depreciation, its allowance would require examination of facts and that must be reflected in a well reasoned document before issuance of notice for reassessment. The primary function of audit in relation to assessments and refunds is the consideration whether the internal procedures are adequate and sufficient.It is not intended that the purpose of audit should go any further. Whether it is the internal audit party of the Income-tax Department or an audit party of the Comptroller and Auditor-General, they perform essentially administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of the income-tax authorities. The Income-tax Act does not contemplate such power in any internal audit organisation of the Income-tax Department but only in those authorities which are specifically authorised to exercise adjudicatory functions.”

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The Hon’ble Apex court,in the case of Indian and Eastern Newspaper Society (supra),had an occasion to consider the question of basing a notice on an audit report.It had observed as under: “For the purpose of imposing a check over the arithmetical accuracy of the computation of income and the determination of tax,internal audit organisation was set up.From 1960 onwards the audit was entrusted to the Comptroller and Auditor General of India.The nature and scope of receipt audit are defined by section 16 of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971.The audit by the Comptroller and Auditor General, as pointed out by the apex court, is principally intended for the purpose of satisfying him with regard to the sufficiency of the rules and procedures prescribed for the purpose of securing an effective check on the assessment, collection and proper allocation of revenue. Para. 3 of the circular issued by the Board dtd. 28.07.1960 warns that " the audit department should not in any way substitute itself for the revenue authorities in the performance of their statutory duties" . Para. 4 of the circular being relevant is reproduced hereunder (page 1003) : " Audit does not consider it any part of its duty to pass in review the judgment exercised or the decision taken in individual cases by officers entrusted with those duties, but it must be recognized that an examination of such cases may be an important factor in judging the effectiveness of assessment procedure . . . It is, however, to forming a general judgment rather than to, the detection of individual errors of assessment, etc., that the audit enquiries should be directed. The detection of individual errors is an incident rather than the object of audit." The Hon’ble Court also observed as under: " Where a Bench of two learned judges of this court observed that a case where income had escaped assessment due to the ' oversight, inadvertence or mistake' of the Income-tax Officer must fall within section 34(1)(b) of the Indian Income-tax Act, 1922. It appears to us, with respect, that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the Income-tax Officer discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opi nion, an error discovered on a reconsideration of the same material (and no more) does not give him that power. That was the view taken by this court in Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC) ; CIT v. A. Raman and Co. [1968] 67 ITR 11 (SC) and Bankipur Club Ltd. v. CIT [1971] 82 ITR 831 (SC) and we do not believe that the law has since taken a different course. Any observations in Kal yanji Mavji and Co. v. CIT [1976] 102 ITR 287 (SC) suggesting the contrary do not, we say with respect, lay down the correct law."

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In Sheth Brothers,(251 ITR 270)the Hon’ble Gujarat High Court,has held as under: " On a reading of a recent decision of this court in the case of Adani Exports v. Deputy CIT [1999] 240 ITR 224, it is seen that the Central Board of Direct Taxes has issued some internal directions to the Assessing Officers to initiate remedial measures by way of reassessment in all cases where audit objection are raised. While dealing with such a situation, the court referred to and applied the ratio of the Supreme Court decision in the case of Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 After extracting the relevant portion from the apex court decision, this court has referred to the facts in detail.Thereafter, the court went on to deal with the Central Board of Direct Taxes instructions as under (page 231) : 'Notwithstanding this clear position of law emerging from the decision of the Supreme Court, the instructions of the Board still persisted that as soon as audit objections are raised, prompt remedial action in the nature of reassessment should be taken even if objection is not accepted by the Income-tax Officer. The instructions are being taken for remedial action, viz., remedial action should invariably be initiated as a precautionary measure in respect of audit objection, even if the objection is not accepted by the Income-tax Officer or without the assessing authority applying his mind to such information for reaching his own conclusion. Once the remedial action is initiated, it can be dropped with the approval of the Commissioner of Income-tax if the objection raised is one of facts and the facts stated to the audit are found to be incorrect. Thus, contrary to the decision of the Supreme Court, the instruction of the Board directs that merely on raising of audit objection remedial action by initiating proceedings of reassessment be taken, notwithstanding that the authority vested with power to exercise jurisdiction for issuing notice is not satisfied about existence of such circumstances which may warrant exercise of such power. To say the least, such ultra vires instructions cannot be pressed into service to save the initiation of proceedings u/s. 147, in the absence of holding of any belief by the Assessing Officer, by arrogating the power to itself by the Board by issuing such directions contrary to the provisions of law at the pain of subjecting the officer to pain of exposing him to charge of insubordination' ." A Full Bench of the Hon’ble Delhi High Court,in the case of Kelvinator of India Ltd.(256 ITR1),had also an occasion to examine a similar aspect.The court examined the effect of amendment to section 147 and Circular No. 549 dated 31/10/ 1989 and observed as under: " It is a well settled principle of interpretation of statute that the entire statute should be read as a whole and the same has to be con sidered thereafter chapter by chapter and then section by section and ultimately word by word. It is not in dispute that the AO does not have any jurisdiction to review his own order.His jurisdiction is confined only to rectification of mistakes as contained in section 154 of the Income-tax Act, 1961.The power of rectification of

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mistake conferred upon the Income-tax Officer is circumscribed by the provisions of section 154 of the Act. The said power can be exercised when the mistake is apparent. Even a mistake cannot be rectified where it may be a mere possible view or where the issues are debatable. Even the Income-tax Appellate Tribunal has limited jurisdiction u/s. 254(2) of the Act. Thus when the AO or Tribunal has considered the matter in detail and the view taken is a possible view the order cannot be changed by way of exercising the jurisdiction of rectification of mistake. It is a well settled principle of law that what cannot be done directly cannot be done indirectly.If the Income-tax Officer does not possess the power of review,he 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 this nature the Revenue is not without remedy.Section 263 of the Act empowers the Commissioner to review an order which is prejudicial to the Revenue." " Another aspect of the matter also cannot be lost sight of. A statute conferring an arbitrary power may be held to be ultra vires article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality, it is trite, should be favoured. In the event it is held that by reason of section 147 if the Income- tax Officer exercises his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional. We are therefore of the opinion that section 147 of the Act does not postulate conferment of power upon the AO to initiate reassessment proceeding upon his mere change of opinion. 24. It is required to be noted, as pointed out by learned counsel for the assessee, that there was no fresh information supplied to the AO by any one including the audit party. In a case like this, the duty of the AO is that he himself should examine the material placed on record and should arrive at a prima facie belief in this behalf. He must record a conclusion that there is escapement on account of excessive depreciation allowance and is required to give reasons in this behalf. He has to justify the exercise of reassessment. In the instant case, the AO while recording the reasons has not done any exercise. Where an assessment has been made and there is purported excessive depreciation, its allowance would require examination of facts and that must be reflected in a well reasoned document before issuance of notice for reassessment. In the instant case, that exercise has not been done. Section 148 of the Act specifically requires the AO to record reasons. The validity of initiation of reassessment proceedings has to be judged with regard to the material available with the authority at the point of time of issuing the notice u/s. 148 of the Act. When the assessee has disclosed fully and truly all material facts necessary for the assessment and on the basis of which the assessment is made, then exercise of powers u/s. 148 of the Act contemplates that : (a) there 12

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must be material for the belief ; (b) circumstances must exist and cannot be deemed to exist for arriving at an opinion ; (c) reasons to believe must be honest and not based on suspicion, gossip, rumour or conjecture ; (d) reasons referred to must disclose the process of reasoning by which the AO holds ' reasons to believe' and change of opinion does not confer jurisdiction to reassess ; (e) there must be nexus between material and belief ; and (f) reasons recorded must show application of mind by the AO (see Sheth Brothers' case [2001] 251 ITR 270 (Guj)). 25. In the instant case, we find that the AO himself has not examined the matter keeping in mind the above principles and merely relying on the audit objection has issued the notice. That is contrary to the requirement of law...... 26. In our opinion, on the same material a different view is sought to be taken and this is nothing but a mere change of opinion and that would not amount to escapement of income. Mere change of opinion would not confer jurisdiction upon the AO to initiate proceedings u/s. 147 of the Act..... In the case of G. Ameer(150 ITR 443)the Hon’ble Kerala High Court has dealt with audit objections and their relevance in following manner: Where an assessment is sought to be reopened on the basis of information furnished by audit objection, if what was supplied by the audit party was merely information and the assessing authority treated it as such information and proceeded to assess, there would be no objection to such a course. If, on the other hand, the audit party expressed a view on the materials and the assessing authority adopting that view decided to reopen the assessment, that might be objectionable. The assessing authority would then be acting not upon any information but upon the view expressed by the audit party. The Hon’ble Gujarat High Court has in the matter of Aryodaya Spinning and Weaving Company Limited(144ITR817) found that the assessee-company was engaged in the business of manufacturing textiles,that it was following the cost method for the purpose of valuing its opening and closing stocks of cloth and yarn for the purpose of income-tax assessment for the past several years,that the same method was also followed for the purpose of preparation of balance-sheet up to the AY.1965-66,that a departure was,however,made from the AY.1966- 67 onwards,that the assessee adopted two methods of valuation of stocks of yarn in process and cloth, one for purposes of the Companies Act, 1956, and another for purposes of income- tax. So far as the yarn in process was concerned, the assessee followed a uniform method of valuing the stock at 12 paise per Kg. for purposes of income-tax. Cost of yarn in process for purposes of its balance-sheet was worked out by adding 25% weaving charges to the cost of ready yarn. For the AY.s.1970-71 and 1974-75, the petitioner followed the same method of

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valuation of its stock which it had followed from the AY.1966-67.In other words, it valued its stock of yarn in process at 12 paise per Kg. for the purpose of income-tax, while it adopted a different method of valuation for the purpose of balance-sheet and profit and loss account, as mentioned above.Statements containing details of methods of valuation adopted by it were filed along with its returns of income.Balance-sheets in which a method different from the one adopted for the purpose of income-tax was followed were also filed in the course of assessment proceedings. In answer to the queries put by the AO in both the years in question, the petitioner had explained the methods of valuation of stock adopted by it. It was after taking into consideration valuation of stock for the purpose of income-tax and valuation of stock for the purpose of balance-sheet, that the AO made suitable adjustments in the assessments for the said year. The AO started reassessment proceedings for the AY.1970-71 on the ground that the method of valuing stock adopted by the assessee had been wrongly described as the cost method and thereby the assessee had misled the Income-tax authorities. Reassessment proceedings were started for the AY.1974-75 u/s.147(a) or in the alternative u/ s.147(b) on the ground that the audit objection had disclosed that the method adopted by the assessee was erroneous. On a writ petition to quash the notices of reassessment: The duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Once he has done that, his duty ends. It is for the ITO to draw correct inferences from those primary facts. It is not the responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts. If the ITO draws an inference which appears subsequently to be erroneous a mere change of opinion with regard to that inference would not justify the initiation of action for reopening assessments under s. 147(a). It would not be open to the ITO to reopen the completed assessment upon a reappraisal of the material considered by him during the original assessment. An error discovered on a reappraisal of the same material without anything more does not give him the power to reopen the assessment under s. 147(b).(emphasis by us). …….on the facts and circumstances of the case, the appendage or label which the petitioner gave to the method of valuation of stock of yarn was not by itself a primary fact necessary for assessment.Even assuming it was a primary fact, the petitioner had simultaneously placed on record in the form of a statement the details or particulars in relation to the valuation of stock. In other words, the actual method adopted by the petitioner for valuing the stock was laid bare in all its essential particulars in the course of the original assessment proceedings. It was for the ITO to draw the correct inference from all those primary facts taken together and to decide, inter alia, whether or not the stock could be said to have been valued at cost

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as claimed by the petitioner. It was no part of the duty of the petitioner to advise the ITO with regard to the true and correct inference which should be drawn from those primary facts as regards the method of valuation. There was, therefore, no justification for reopening the assessment in either of the assessment years under consideration under s. 147(a). The factual information supplied by the audit objection was already considered by the ITO when he framed the assessment.The ITO had stated that the acceptance of the method of valuation of stock was erroneous.The error,if any, was discovered on a reappraisal of the same material on record. This was, therefore, a case of mere change of opinion. The ITO, therefore, had no jurisdiction to reopen the assessment for 1974-75 under s. 147(b).” In the matter of Anil Starch Products Ltd.(134 ITR 355) the Hon’ble Gujarat High Court had found that a notice of reassessment was issued on information received from an audit objection pertaining to deduction of two items, namely, (1)fees paid in connection with appearance before the MRTP Commission, and (2) gratuity actually paid to employees. Deciding the matter the Hon’ble Court held as under: The opinion of the internal audit party of the I.T. Dept. cannot be regarded as "information" within the meaning of s. 147(b) of the I.T. Act, 1961, for the purpose of reopening an assessment.Although an audit party does not possess the power to pronounce on the law,it nevertheless may draw the attention of the ITO to it. While the law may be enacted or laid down only by a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose. ...... at the time of the original assessment all the relevant facts including the directors' report which was part and parcel of the balance-sheet was duly submitted and the ITO had considered all the material and allowed deduction of legal expenses. The audit department had not pointed out any binding judgment of a High Court or the Supreme Court on this aspect nor had it pointed out any statutory provision which the ITO may have missed on the earlier occasion.Therefore, the ITO had no jurisdiction to reopen the assessment on this ground. The ITO had allowed deduction of gratuity after considering the relevant provisions. On receipt of the audit objection the ITO held that his earlier view was not correct. That could not be called "information" within the meaning of s. 147(b). The notice of reassessment was invalid and liable to be quashed.” 5.2.We would like to refer to some of the matters dealing with the concept of change of opinion,as the courts are unanimous that re-assessment proceedings,initiated because of change of opinion,have to be quashed.

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Facts of the first case i.e. Central Warehousing Corporation Ltd.(382ITR 172)were that the assessment of the assessee for the AY.2005-06 was completed u/s.143(3) of the Act.The AO subsequently reopened the assessment on the ground that he had inadvertently failed to notice that income of the assessee from the disposal of stocks in the bonded warehouse had escaped assessment.The Tribunal held that the reopening of the assessment was invalid. Dismissing the appeal filed by the department the Hon’ble Delhi High Court held as under: ……the original assessment was framed under section 143(3) of the Act and while framing original assessment,a specific query was raised by the Assessing Officer and was clarified by the assessee in writing. It was not a case where relevant material was not disclosed by the assessee in the first round of assessment. Thus the reopening of the assessment by the Assessing Officer for the assessment year 2005-06 was based on a change of opinion, which was impermissible in law. In the matter of Tirupati Foam Ltd.(380ITR493)the Hon’ble Gujarat High Court held that where the issue of accounting treatment in respect of unutilised Cenvat credit for the purpose of valuing the closing stock was already examined by the AO during the scrutiny assessment, reassessment proceedings,on the same issue without any tangible material,was mere a change of opinion and, hence,not sustainable. In the case of Turner Broadcasting Systems Asia Pacific Inc.(380ITR412)following proposi - tions of law laid down by the Full bench of the Hon’ble Delhi High Court in the case of Usha International Ltd.(348 ITR 485),were referred to: (i)the expression “change of opinion” postulates formation of opinion and then a change thereof. In the context of section 147 of the Income-tax Act, 1961, it implies that the Assessing Officer should have formed an opinion at the first instance, i.e., in the proceedings under section 143(3) and by initiation of the reassessment proceedings, the Assessing Officer proposes or wants to take a different view ; (ii) reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and was decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by the principle of “change of opinion” ; and (iii) reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations, it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, whether or not he had recorded his reasons in the assessment order.” 16

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5.3.The facts of the above case were that the assessee was a company incorporated in the U. S. A. and was a tax resident of the U. S. A.During the relevant financial years, it derived income from the grant of exclusive rights to TIIPL in India to sell advertising on the products and to distribute certain products.It filed its returns for the AY.s.2007-08 and 2008-09.The assess -ments were made and the AO in the assessment orders had referred to the mutual agreement to avoid double taxation under article 27 of DTAA between India and the U. S. A, for the AY.s.2001-02 to 2004 -05 and the fact that subsequently for the AY.2005-06, assessment was concluded following the mutual agreement procedure.The AO in the assessment order had specifically recorded that since the facts of the year under consideration remained the same, following the agreement reached by the respective competent authorities in the earlier years, the tax was computed at 10% according to resolutions passed in the mutual agreement procedure.Notices of reassessment were issued in respect of both the assessment years. 5.4.On writ petitions against the notices,the Hon’ble Delhi Court held that no fresh information or material had been referred to in the reasons recorded for seeking to reopen the assessment,that the material that was referred to was the very same material that was already before the AO at the time of framing of the assessments u/s.143(3) of the Act and even the reasons recorded that ‘from the perusal of the assessment record, it is observed that’,that it showed that the AO had sought to re-appreciate the material that was already there at the time when the assessment was framed u/s.143(3),that it was clearly a case of change of opinion,(emphasis by us)which was clearly not permissible,that the notices were not valid.We would also like to reproduce paragraphs 16 and 17 of the order and same read as under: 16. Perusal of the assessment orders in both the petitions clearly show that an opinion was formed by the Assessing Officer that taxation of advertisement and distribution revenue was to be governed by the MAP resolution and the competent authorities of the USA and India had agreed to an attribution of 10 per cent. of the total revenue generated from the said distribution and advertisement sales agreement. The same was agreed to be treated as business income. 17. A detailed questionnaire had been issued to the petitioner, which was duly replied to. As many as 38 queries had been raised and a detailed reply along with all annexures and supporting documents were furnished by the petitioner in response to the queries raised. The copies of the relevant agreements, the generation of income and the tax treatment given by the petitioner to the said income was duly disclosed to the Assessing Officer. The material based on which the reopening has been sought to be done by the Department was available 17

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before the Assessing Officer at the time of the framing of the assessment under section 143. Not only was the same before the Assessing Officer, the Assessing Officer has referred to the same in the assessment year and taken note of the same. Now we would like to refer to the case of Hewlett-Packard Globalsoft Pvt. Ltd. (380 ITR 386),the Hon’ble Karnataka High Court.Facts of the case were that the assessee was a company engaged in the business of software development.For the AY.2003-04,in its return of income it had claimed deduction u/s. 10A of the Act.The return of income was processed and selected for scrutiny.While claiming the deduction the assessee had excluded the expenses incurred in foreign currency for providing technical services and had included the profits derived from technical services in the eligible profits for deduction u/s.10A.The claim was allowed.Thereafter, notice was issued and reassessment was completed excluding the profits derived from technical services from the eligible profits.The Tribunal annulled the reassessment proceedings.On appeal to the High Court,the matter was decided as follow: “…..it could be seen from the original assessment records that the claim of the assessee under section 10A was thoroughly scrutinised,the Assessing Officer had examined the claim of expenditure incurred in foreign currency for providing technical services allocating the sum of Rs.38,51,45,781 between the five software technology park units in the ratio of the export sales. In fact, the Assessing Officer had raised certain queries during the assessment proceedings and a detailed reply had been given by the assessee. Jurisdiction under section 147 of the Income-tax Act, 1961, can be invoked by the Assessing Officer where he has reason to believe that income chargeable to tax has escaped assessment. However, such “reason to believe” cannot be based on a mere change of opinion. The Assessing Officer does not have jurisdiction to review his own order. ……The Tribunal was fully justified in arriving at the conclusion that the reopening of assessment was by change of opinion. The reassessment was not valid.” In the matter of Plus Paper Food Pac Ltd.(374ITR485)issue of depreciation was dealt by the AO in the original assessment passed u/s.143(3)of the Act.Later on,he issued notice u/s.148 with regard to allowability depreciation.Matter travelled up to the Hon’ble Bombay High Court and was decided as under: “Reassessment proceedings can be initiated only if the Assessing Officer has reason to believe that income has escaped assessment.The words “reason to believe” must receive an interpretation which is in consonance with the scheme of the law. There cannot be arbitrary powers to the Assessing Officer to reopen assessment on the basis of a mere change of opinion. The Assessing Officer has no power to review. He has only a power to reassess. In the garb of reopening the assessment, a review cannot take place………the original

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assessment order in the present case had obviously taken into account the aspect of depreciation.Perusal of the assessment order revealed that all relevant documents and details as called for were filed. It was further recorded in the assessment order that the details of the assessee-company along with the return of income and those which were called for assessment proceedings were scrutinised. There did not appear to be tangible material/reason for the Assessing Officer to reopen the assessment proceedings in the facts of the present case. The reasons offered by the Assessing Officer while rejecting the objection on the basis that the issue involved in reassessment proceedings were never examined by the Assessing Officer were not tenable. No particulars whatsoever had been relied upon by the Assessing Officer while rejecting the objections…... Though the power to reopen is much wider but the interpretation that the words "reason to believe" must receive an interpretation which is in consonance with the scheme of the law. There cannot be arbitrary powers to the Assessing Officer to reopen assessment on the basis of mere change of opinion. The Assessing Officer has no power to review. He has only a power to reassess. In the garb of reopening the assessment review cannot take place…..Having regard to the purpose of the section, we are of the view that the power conferred by section 147 does not provide a fresh opportunity to the Assessing Officer to correct an incorrect assessment made earlier…..The decision to reopen assessment was not based on proper reasons but obviously was a result of change of opinion.This was impermissible. The notice of reassessment was not valid and was liable to be quashed.” 5.5.In our view,the entire approach of the AO and the FAA,in the background of the present case,is misconceived.The re-assessment order is based on allowability of provision of bad and doubtful debts.Perusal of the assessment order reveals that such details were called for by the AO.It is further found that the details of the provisions for bad and doubtful debts furnished by the assessee were scrutinized during the original assessment proceedings.In the notes accompanying the return of income the assessee had specifically mentioned the fact and basis of treating the amount in question in a particular manner.In these circumstances,there does not appear to the tangible material/reason for the AO to reopen the assessment proceedings in the facts of the present case.He himself admits that ‘scrutiny of the records revealed’ that there was escapement of income.So,the reasons,recorded by him,have to be analysed considering the post scrutiny events.An audit objection was raised by the Audit authorities-vide his letter,dtd.25/8/2011,the Sr.Audit Officer intimated the AO as under :- Subject:- incorrect computation of business income As per Provision of Section 37 of IT Act envisages that an amount debited in the Profit & Loss A/c in respect of accrued or ascertained liability only is an admissible deduction, while any provision in respect of any unascertained liability or liability which has not accrued, do not qualify for deduction. In this regard CBDT also instructed all assessing officer vide

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instruction No17/2008 to verify the provisions on different accounts claimed by the bank probably under the RBI guidelines( i.e Provision for wage arrears for which negotiations are yet to be finalized, provision for standard assets/advances etc .... ). A contingent liability cannot constitute deductible expenditure for the purpose of Income Tax Act. Thus, putting aside of money which may become expenditure on the happening of an event would not constitute an allowable expenditure under the Income Tax Act. It was noticed from the relevant records of captioned assessment year 2008-09 that assessing officer determined assessed income of Rs 3377008315/- after disallowance of Provision on investment, under section 14A and disallowance u/s 35D. Audit scrutiny of computation of income revealed that assessee has claimed deduction u/s 36(1)(viia) for an amount of Rs. 200734588/- and the same was allowed by the department as given below:-

A.Y.2008-09 A.Y.2007-08 A.Y.2006-07 General loan loss provision 179594700 254229012 72962742 (i.e., Provision for standard asset/advances as per RBI Guidelines) …. A Provision for NPA …. B 21139888 Nil Nil Total Provisions (C)=A+B 200734588 254229012 72962742 Total income before 3409899537 1682358394 831125223 deduction … D 7.5% 255742465 126176880 62334392 Deduction u/s.36(1)(viia) 200734588 126176880 62334392 lower C and D It could be seen from the above that assessee is regularly creating provision for standard assets/advances (see note forming part of the accounts 18.4.3) under the head General 10 provision excluding Provision for NPA and claiming 36(1)(viia) on that from the last three assessment years. Thus, assessee banking company is simply putting aside money by creating provision for standard asset/advances to meet unascertained liability that may become expenditure on the happening of an event in future( last three-years not bad debts) which is inadmissible deduction and contradictory to the CBDT's instruction.” However,the the AO was of the opinion that stand taken by him about the provisions of bad and doubtful debts was as per law.He stuck to the stand that was taken by him during the original assessment.The AO,vide his letter dt.18.1.2013,addressed to the Director of Audit (ITRA)intimated that objections raised by audit authorities were unacceptable.His letter reads as under :- Sub:- Revenue audit objection in the case of Yes Bank Ltd. for A.Y. 2008-09 (AQ No. 3& 4 51st Cycle) Please refer to the above. The audit has pointed out that (i) The AO has not added back preliminary expenses of Rs.5677691/-and (ii) A.O. has allowed deduction of provision for standard asset of Rs. 179594700/ -. The above objections are not acceptable on the following grounds:- (i) Deduction u/ s.35D Before commencement of Business in the financial year ended 31.3.2004, the assessee bank has incurred the following expenses:

Particulars Amount Registration fee and other charges under the Companies Act on 27,117,200 incorporation of the Company. Legal Fees for drafting of memorandum and Articles of 1,271,254 association on incorporation of the company.

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Total 28,388,454 The above expenses are covered under Sec 35D(2) and the claim is made under Sec 35D (1). (i) of the Income Tax Act. As the claim is under Sec 35D (1) (i), the restriction for industrial undertakings does not apply and the section is available to all assesses. The reading of the section is as below: Quote· 35D. (1) Where an assessee, being an Indian-company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),- (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 2-[***] undertaking or in connection with his setting up a new 2.[***] unit, Unquote From the above reading, it is clear that Sec 35D (1) (i) is applicable to all assessees and not restricted to "industrial undertaking". Sec 35D (1)(ii) is applicable to undertaking/ industrial undertaking. Since the expenditure of Rs.28,388,454 was incurred before the commencement of business, as per Sec 35D (1) (i), 1/5th of amount of preliminary expense can be claimed over a period of 5 years. Accordingly, one fifth of the amount i.e. Rs.5,677,691/- has been claimed in the tax returns for periods commencing Assessment Year 2005-06 to 2009-10 (ii) Provision for Standard Asset Reserve Bank of India ("RBI") has issued various circulars on prudential norms Income Recognition, Asset Classification and Provisioning pertaining to Advances. These circulars also prescribe the provisions to be made in respect of Non PerformingAdvances ("NPA"s). NPAs 'are further classified as Sub-Standard, Doubtful and Loss Advances. Apart from NPAs, RBI circulars also prescribe provisions to be made in respect of Standard Advances, i.e. advances other than NP As. As per current regulations, Banks are required to make a general provision 0.40% and in case of sensitive advances like personal loans, capital markets, real estate, there are higher%'s prescribed which at present is 2%. Requirement of additional provisioning is to reduce the risk in the case of growth in the balance sheet and serves as a buffer when the assets are classified as NPA. For the financial year ended 31.3.2007, the provision was based on the RBI circular dated January 31, 2007, RBI/ 2006-2007/240 DBOD.No.BP.BC. 53 /21.04.048 / 2006-2007 (copy attached). . The workings as on 31.03.2007 and the P and L expense for the year is as below: Breakup of advances into Gross value of Rate of Amount advances provisioning

Direct Agriculture 9,934,332,360 0.25% 24,835,831 Loans to Staff 4,051,308 1.00% 40,513 Personal Loans 489,801,475 Secured Commercial real 4,415,510,653 estate Capital Mkt Exposure 2,079,747,510 6,985,059,638 2.00% 139,701,193 Exposure to Small and 322,271,534 0.25% 805,679 Micro enterprises Non Deposit taking NBFCs 1,931,503,527 2.00% 38,630,071 All other Loans and Advances including 75,040,926,121 0.40% 321,803,168 adversely labeled Accounts

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Total Provision require as 525,816,454 on March 31, 2008 Provision as on March 346,221,754 31,2007 P&L expense for the 179,594,700 financial year 2007-08

In the tax return for Assessment year 2008-09, the entire amount of Rs. 179,594,700 added in the return of Income and was considered for the purpose of the Sec 36(1)(viia) as follows: A.Y 2008-09 General Loan Loss Provision (as per the Guidelines 179,594,700 issued by the Reserve Bank of India ) …(A) Provision for Non-Performing assests(as per the 21,139,888 Guidelines issued by the Reserve Bank of India )..(B) Total Provision (C)= (A)+(B) 200,734,588 Total Income (computed before making any deduction 3,409,899,537 under this clause and Chapter VIA)…(D) sec 36(1)(viia)- Refer computation of Income 7.5% 255,742,465 Deduction under section 3691)(viia) Lower of (C) and 200,734,588 (D) In assessment year 2009-201Q and 2010-2011, when certain bad loans which were written off, the benefit for the actual write -off of debts was taken only after reducing the balance under Sec 36 (1) (viia) (which included the above mentioned balance) and the workings are given below: Financial Year Claim in the return under Sec.36(1)(viia) 2005-06 62,334,392 2006-07 126,176,880 2007-08 200,734,588 2008-09 412,298,107 Total 801,543,967

Write off in FY 2008-09 136,168,701 Write off in FY 2009-10 826,029,606 Total 962,198,307 (A) Balance in 36(1)(viia) 801,543,967 (B) Write off claimed in FY 160,654,340 (A)-(B) 2009-10 The total write offs for Assessment year 2009-10 was Rs 136,168,701/- and for Assessment year 2010-11 was Rs 826,029,606 and the same were added in the return of Income. However,the claim for write off of Bad Loans for Assessment year 2009-10 was Rs. Nil and was limited to Rs 160,654,340/- only, for Assessment year 2010-11. In view of the above, the objection is not acceptable and it is requested that the same may be withdrawn and treated as settled under intimation to this office.” Even a cursory look at the reply of the AO leaves no doubt that the AO was not convinced about the reasons given by the audit party for disallowing the claim.Not only he stated that claim was sustainable as per the provisions of the Act,but,also indirectly questioned the validity of the objection.But,it is a fact that he had issued a notice u/s.148 of the Act.A comparison of the audit objection raised by the audit party and the notice issued by the AO as per the provisions of section 148 clearly prove that it was solely based on the audit object -

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tions.Thus,the AO has taken two diagonally opposite stands in the original assessment/ in the reply sent to the audit party and while issuing the notice u/s.148 of the Act.There is not an iota of doubt that it is a clear case of change of opinion. A question may arise,that if he was not convinced that the validity of the objection raised by the audit party then why did he issue a re-assessment notice.The simple and obvious answer is binding nature of provisions of section 119 of the Act which stipulates that the Circulars/ Instructions issued by the CDBT have to be followed by the officers of field formation and at that time Circular no.9/2006 was very much there.The said circular had tied down the hands of the AO.s.There was no option with the them at that time.Once they received an objections from the audit wing, they had to take a remedial actions compulsorily.In short,the AO had invoked the provisions of section 147 of the Act not because he was convinced about the escapement of income,but because he had no alternative.

5.6.In the earlier part of our order,we have deliberated upon the cases dealing with audit objections.From the said discussion it is clear that the quasi judicial powers of the AO cannot be curtailed by circulars or instruction of the CBDT.The Board(CBDT) vide its Cir.No. 8/2016(dated-17.3.2016) has modified the Instruction No.9 of 2006.By issuing the said Circular the CBDT has followed the observations of the Hon’ble Gujarat High Court in the case of Seth Brothers(supra)and has restored back the earlier position i.e.,that if the departmental authorities are not satisfied about the correctness of the objections,they need not to take any remedial action.In short,the instruction has done away with compulsory initiation of remedial action in case of an audit objection and has restored the legitimate powers of the AO.s.,after the Hon’ble Courts had clearly opined that earlier circular was not in accordance with the provisions and spirit of the Act.

Audit authorities,an outside agency,definitely has an important role to point out irregulari - ties of assessment orders. But,a Laxamn-Rekha has to be there for audit party.It is not the job of an audit party to interpret the law with regard to facts of a case.Act does not give mandate to the audit personnel to hold that the provisions should be interpreted in a particular manner or to assess the income of an assessee in a particular manner.It is the prerogative of an AO.In the case under consideration the it was not the case of the audit that the AO,while completing the scrutiny assessment,had ignored the judgment of the Hon’ble Apex Court or the Hon’ble jurisdictional High Court resulting in under assessment of the taxable income.No arithmetical mistake or calculation error was also pointed out by the audit party.It had interpreted the law

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with regard to provisions of section 35D and 36(viiia)of the Act in a particular manner and held taxable income had escaped assessment.In our opinion,such an observation is beyond the power of any audit party and same cannot be termed information for the purposes of section 147 of the Act.Such an observation is not a reliable material-leave apart the tangible material- that can be legally relied upon for disturbing a scrutiny assess -ment.In the instant case,the AO has reviewed/re-appraised the issue of provisions of doubtful debts,while passing order u/s.147 of the Act.But,the section does not permit the review or re-appraisal of facts deliberated and decided in the original scrutiny assessment.

6.Considering the facts that the assessee had filed all the necessary details about the bad and doubtful debts,called for by the AO,during the assessment proceedings,that the AO had passed an order u/s.143(3)of the Act after considering the said details,that he supported the said order while replying to the audit objections,that the AO had no option but to take a remedial action in pursuance of the Board circular No. 9/2006 and respectfully following the judgments of Indian Experess(supra),Turner Broadcasting Systems Asia Pacific Inc.(supra), Anil Starch Products Ltd.(supra), Aryodaya Spinning and Weaving Company Limited (supra) and Aroni Commerci-als Ltd. supra),we hold that the order of the FAA cannot be endorsed. The facts and circumstances reveal and we are satisfied that in the present case, the order of reopening of the assessment was not be justified.The decision to reopen the assessment was not based on proper reasons,but was obviously a result of change of opinion- it was solely based on the audit objection.This is impermissible and therefore not valid.

We would like to refer to the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra).In that case it was found that the return was processed u/s. 143(1). The AO issued a notice u/s.148 on the basis of an audit objection and the matter travelled upto the Hon'ble Supreme Court . Deciding the case, the Hon’ble Court held as under :- “Under the scheme of section 143(1) of the Income-tax Act, 1961, as substituted with effect from April 1, 1989, and prior to its substitution with effect from June 1, 1999, what were permissible to be adjusted under the first proviso to section 143(1)(a) were : (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction, allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return, and similarly (iii) those claims which were, on the basis of the information available in the return, prima facie inadmissible, and were to be rectified/allowed/dis-allowed. What was permissible was correction of errors apparent on the basis of the documents accompanying the return. The Assessing Officer had no authority to make adjustments or adjudicate upon any debatable issues. In other words, the Assessing Officer had no power to go behind the return, accounts and documents, either in allowing or in disallowing deductions, allowance or relief. Though technically the intimation issued was deemed to be a demand notice under section 156, that

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did not preclude the right of the Assessing Officer to proceed under section 143(2) : that right is preserved and not taken away. With effect from April 1, 1998, the second proviso to section 143(1)(a) was substituted. During the period between April 1, 1998, and May 31, 1999, sending of an intimation was mandatory. The legislative intent is very clear from the use of the word “intimation” as substituted for “assessment” that two different concepts emerge. While making an assessment, the Assessing Officer is free to make any addition after grant of opportunity to the assessee. By making adjustments under the first proviso to section 143(1)(a) no addition which is impermissible by the information given in the return could be made by the Assessing Officer. The intimation under section 143(1)(a) cannot be treated to be an order of assessment. Under the first proviso to the newly substituted section 143(1), with effect from June 1, 1999, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be an intimation under section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgment is not done by any Assessing Officer, but mostly by ministerial staff. It cannot therefore be said that an “assessment” is done by them. The intimation under section 143(1)(a) was deemed to be a notice of demand under section 156 for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. Nothing more can be inferred from the deeming provisions. Therefore, there being no assessment under section 143(1) (a), the question of change of opinion does not arise. ” In the case before us,the AO had completed the assessment u/s.143(3)of the Act and deliberated upon the issue.Not only this he did not accept the audit objection also.An intimation is totally different from a scrutiny assessment.Therefore,the case relied upon by the DR is of no help to the Revenue.

7.While deciding the jurisdictional issue with regard to re-opening,we have held that the order of the AO was invalid, therefore,we are not deciding the issue on merits.

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8.Considering the invalidity of the re-assessment proceedings,as held in the earlier part of our order,grounds of appeal raised by the AO,are dismissed. As a result,appeal filed by the assessee stand allowed and the appeal of the AO is dismissed. फलतःिनधा�रती दािखल क� गई अपील मंजूर क� जाती है और िनधा�रती अिधकारी क� अपील नामंजूर क� जाती है. Order pronounced in the open court on 24th August,2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 24 अग�त, 2016 को क� गई । Sd/- Sd/- (राम लाल नेगी / R.L.Negi ) (राजे�� / Rajendra) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई Mumbai; �दनांकDated : 24 .08.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ� 2. Respondent / !यथ� 25

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3.The concerned CIT(A)/संब% अपीलीय आयकर आयु(, 4.The concerned CIT /संब% आयकर आयु( 5.DR “ G ” Bench, ITAT, Mumbai /िवभागीय ितिनिध, खंडपीठ,आ.अ.)याया.मुंबई 6.Guard File/गाड� फाईल स!यािपत ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.