Gujarat H.C : Where assessee in accordance with project completion treated expenses on project, reopening of assessment on ground that assessee should have followed another method for expenses could not be upheld

High Court Of Gujarat

H.K. Buildcon Ltd. vs. ITO

Assessment Year : 2005-06

Section : 147

D.A. Mehta And Ms. H.N. Devani, JJ.

Special Civil Application No. 184 Of 2010

April 12, 2010

JUDGMENT

D.A. Mehta, J. – Considering the scope of the controversy, the petition is taken up for final hearing and disposal today. Rule. Learned advocate appearing for the respondent is directed to waive service of rule.

2. This petition has been preferred challenging the validity of notice dated September 24, 2009, issued under section 148 of the Income-tax Act, 1961 (“the Act”) (annexure A) as well as reassessment order dated December 21, 2009, framed under section 144 read with section 147 of the Act for the assessment year 2005-06.

3. Upon issuance of notice, the respondent put in appearance and has tendered affidavit-in-reply dated March 29, 2010. On April 5, 2010, when the matter came up for hearing, the following order came to be made by the court :

“In the light of the ratio of the judgment reported in [2008] 307 ITR 115 (Guj) in the case of Hynoup Food and Oil Industries Ltd. v. Asstt. CIT. Learned counsel appearing for the respondent authority is directed to produce the original record to establish that the successor Assessing Officer had made a noting in relation to the reasons recorded prior to issuance of notice under section 148 of the Income-tax Act, 1961. To come up on April 12, 2010.”

4. Today, learned advocate appearing for the respondent authority has produced the original file containing the original record and proceedings for the perusal of the court. The order-sheet reveals that on September 24, 2009, the successor Assessing Officer has recorded that having gone through the record as well as the reasons recorded by the predecessor Assessing Officer, he is (not ?) in agreement with the said reasons and has directed issuance of notice. Hence, the preliminary objection based on the ratio of the judgment in the case of Hynoup Food & Oil Industries Ltd. v. Asstt. CIT [2008] 307 ITR 115/175 Taxman 331 (Guj), would not survive.

5. In so far as the exercise of jurisdiction under section 147 of the Act is concerned, the submission on behalf of the petitioner was that though the impugned notice has been issued within a period of four years from the end of the relevant year, yet the reasons recorded would indicate, when read in the context of the record of the original assessment proceedings, that the reassessment proceedings are based merely on a change of opinion without pointing out as to what is the escapement of income.

6. On behalf of respondent authority, reliance has been placed on the affidavit-in-reply, and it is submitted that for the assessment year 2006-07, an elaborate assessment order has been framed covering all the issues and on the basis of the same, the reasons were recorded on March 27, 2009, for reopening the assessment for the year under consideration, namely, the assessment year 2005-06. Learned advocate has referred to the reassessment order dated December 21, 2009, to emphasize that the concept of mutuality was not applicable as recorded in the communication dated November 27, 2009, as well as the findings recorded in paragraph 4 of the assessment order dated December 21, 2009, wherein the relevant extracts from the assessment order of the assessment year 2006-07 have been reproduced.

7. It is an accepted position that the Assessing Officer, while framing the original assessment, issued notice under section 142(1) of the Act. On February 20, 2007, various submissions were made by the petitioner in response to the notice under section 142(1) of the Act. Subsequently, fresh notice dated July 5, 2007, under section 142(1) of the Act was issued, fixing the hearing on July 13, 2007. On July 20, 2007, the petitioner responded, followed by further submissions on August 13, 2007. Once again, one more notice came to be issued under section 142(1) of the Act on October 9, 2007. On November 23, 2007, submissions were made, followed by the submissions on November 30, 2007, as well as December 24, 2007 (two letters of the same date). The original assessment under section 143(3) of the Act was framed on December 26, 2007.

8. The reasons recorded for reopening the concluded assessment for the assessment year 2005-06 read as under :

“Reasons for reopening of the assessment under section 148 of the Income-tax Act :

Reg : H. K. Buildcon Ltd., A’bad PAN-AABCH 2762C.

In this case, the assessee has filed its return of income on December 20, 2005, declaring the total income of Rs. nil. Thereafter, the order under section 143(3) of the Income-tax Act was passed determining the income at Rs. nil on December 26, 2007.

(2) Thereafter, it is observed that the assessee is engaged in the construction business ; followed the project completion method and accordingly did not prepare the profit and loss account. The expenses were to be accounted on the work completion basis as per clause E of Schedule 7 to the balance-sheet. The expense incurred on the project was, shown work-in-progress (WIP), in the balance-sheet. At the end of March 31, 2005, the construction work-in-progress (WIP) was Rs. 4,12,09,737. The assessee had collected advance to the tune of Rs. 1,20,56,460 from customers against the price fixed for the units to be sold and, thus, the proportionate income accrued could be estimated. Thus, profit percentage of completion of the project is estimated in respect of which the W.I.P. ; at 10 per cent. of the W.I.P. of Rs. 4,12,09,737. The underassessment of income was to the tune of Rs. 41,20,974 (10 per cent. of Rs. 4,12,09,737).

(3) In view of the above, I have reason to believe that income of the assessee to the extent of Rs. 41,20,974 has escaped assessment and, therefore, the assessment is required to be reopened.

Date : 27-03-2009

B.L. Meena,

Income-tax Officer, Wd-4(3)

Ahmedabad.”

9. A plain reading of the reasons recorded would indicate that the Assessing Officer is of the opinion that the method of accounting employed by the assessee was to be given a go-bye and estimated profit had to be worked out by applying the rate of 10 per cent. to the value of work-in-progress. In the entire reasons recorded, there is nothing on record to show as to what income had escaped assessment for which the Assessing Officer received information subsequently, either from external source, or from any other source.

10. As against that, when one goes through the various submissions made by the petitioner in response to the notices under section 142(1) of the Act, before the assessment was originally framed on December 26, 2007, it becomes clear that in relation to the very issue which forms the basis of reasons recorded, a specific query was raised by the Assessing Officer and the petitioner had replied on December 24, 2007, in the following words :

“(1) Accounting system adopted

We are following the completion method for transferring work-in-progress to land and building account since we directly purchase materials and hire labours for development construction activity. We book the members on their interest basis irrespective of stage of work. We allot shares to them to part with ownership of land and building. We are not preparing any profit and loss account for our company in the period of construction as all the expenditure are debited to work-in-progress and transfer at the completion of work to land and building account on one side and members contribution to reserve and surplus account under building fund. We are enclosing here-with details of dwelling and shop units proposed floor-wise along with total size of floor and constructed areas for your kind perusal. Annexure 1.”

11. Thus, it is apparent that, on the same set of facts and material available on record, the successor Assessing Officer has come to form a different opinion and recorded reasons thereupon without establishing any lapse on part of the petitioner or any fresh information. The settled legal position in this regard has been reiterated by the apex court recently in the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC), wherein the court has held in paragraph 6 of the judgment that there is a conceptual difference between the power to review and the power to reassess. The Assessing Officer has no power to review ; he has only power to reassess. It is further laid down that reassessment has to be based on fulfilment of certain precondition and if the concept of change of opinion is removed, then, in the garb of reopening the assessment, review would take place. It is further laid down that one must treat the concept of change of opinion as an in-built test to check abuse of power by the Assessing Officer. After referring to Circular No. 549, dated 31st October 1989, ([1990] 182 ITR (St.) 1) explaining the amendment made by the Amending Act, 1989, to reintroduce the expression “reason to believe” in section 147 of the Act, the apex court has come to the conclusion that if the phrase “reason to believe” is omitted, the same would give arbitrary powers to the Assessing Officer to reopen the past assessment on mere change of opinion and this is not permissible even as per the legislative intent.

12. In the light of the facts noted hereinbefore, the ratio enunciated by the apex court in the aforesaid decision would apply with all force, as in the present case, the reasons recorded themselves indicate that the successor Assessing Officer has merely recorded a different opinion in relation to an issue to which the Assessing Officer, who had framed the original assessment, had already applied his mind and come to a conclusion that the method of accounting employed by the petitioner was correct and was not required to be disturbed.

13. In the circumstances, the impugned notice dated September 24, 2009, issued under section 148 of the Act and the consequential reassessment order dated December 21, 2009, framed under section 144 read with section 147 of the Act are hereby quashed and set aside. The petition is allowed accordingly. Rule is made absolute. There shall be no orders as to costs.

[Citation : 339 ITR 535]