Gujarat H.C : Reassessment to make disallowance under section 40(a)(ia) held not justified when Assessing Officer had thoroughly and fully scrutinized assessee’s claim in scrutiny assessment

High Court Of Gujarat

Transwind Infrastructure (P.) Ltd. Vs. ITO,Ward – 8(1)

Section : 147, 40(a)(ia)

Akil Kureshi And Ms. Sonia Gokani, Jj.

Special Civil Application No. 357 Of 2013

April  16, 2013


Akil Kureshi, J. – Heard learned counsel for the parties for final disposal of the petition. Petitioner has challenged a notice dated 30.03.2012 as at Annexure A to the petition issued by the respondent-Assessing Officer under Section 148 of the Income Tax Act,1961.

2. Petitioner is a company registered under the Companies Act. For the assessment year 2007-2008, petitioner filed its return of income on 29.10.2007 declaring total income of Rs. 36,27,970/-. In such return, the petitioner had claimed labour expenditure of Rs. 9.48 crores (rounded off). As per the petitioner, on the balance labour payment of Rs. 3.05 crores (rounded off), provision of TDS was not applicable and, therefore, no tax was deducted at source.

3. Assessing Officer framed scrutiny assessment under Section 143(2) of the Act. He discarded petitioner’s contention that TDS was not applicable for the remaining labour charges. He made ad-hoc disallowance of Rs. 25,60,000/- at 8% of the total payments in his order of assessment dated 30.12.2009.

4. Petitioner challenged the said disallowance before the CIT(A), who, by his order dated 15.12.2010, deleted such additions on the ground that TDS provision was not applicable. We are informed that the Revenue has filed appeal against such order of CIT(A) which is pending before the Tribunal.

5. On 30.12.2012, the respondent issued impugned notice. The petitioner was supplied reasons recorded for issuance of such notice which read as under:

“In this case on verification of case record it is noticed that the assessee is engaged in the business of contractor with different agencies. On verification of the P & L account it is notice that the assessee has incurred total labour payment expenditure of Rs. 9,48,23,819/- out of which the assessee had deducted TDS on labour payment of Rs. 6,48,55,517/- and the balance labour payment amounting to Rs. 3,05,68,302/- was paid to other labour on which TDS was not deducted. Therefore as per section40(a)(ia) of the IT Act the expenditure would be allowed as deduction from the taxable income, only if tax is deducted and paid in to government account. Therefore the payments amounting to Rs. 3,05,68,302/- paid on work contract section 40(a)(ia) of the IT Act which required to be disallowed as assessee company has not deducted tax and paid to the government account.

Failure to do so resulted in under assessment of Rs. 3,05,68,302/-. In view of the above, escapement of Rs. 3,05,68,302/-. I have therefore, every reason to believe that by reason of omission on the part of the assessee to disclose fully and truly all material relevant for the assessment, the income of the assessee has escaped assessment within the meaning of section 147 of the I.T. Act, for the A.Y. 2007-08.”

6. Petitioner thereupon raised objections under communication dated 21.05.2012 to the notice of reopening. Such objections were, however, rejected by the respondent by an order dated 26.12.2012. Hence, the petition.

7. From the record and from the submissions of the counsel for the parties we notice that the only ground indicated in the reasons recorded by the Assessing Officer is that on the labour payment charges of Rs. 3.05 crores, though required, TDS was not deducted. Therefore, under Section 40(a)(ia) of the Act, entire expenditure had to be disallowed. He, therefore recorded that “failure to do so resulted in under assessment of Rs. 3,05,68,302/-“.

8. From the tenor of the reasons itself, we gather that it is not as if that the Assessing Officer framing scrutiny assessment had overlooked this aspect of the matter but, having enquired with the assessee and having concluded that tax at source though required, was not deducted, made disallowance on ad-hoc basis which, according to the revenue, was not in order. Entire amount should have been disallowed from the claim of expenditure.

9. In addition to the above conclusions, we also notice that in the assessment order itself, the Assessing Officer had discussed this issue in following manner:

“6. Disallowance out of labour payments:

During the year under consideration, the assessee had incurred total labour payment expenditure of Rs. 9,48,23,819/-. Out of this expenditure the assessee has deducted TDS on labour payment of Rs. 6,42,55,517/- and the balance labour payment of Rs. 3,05,68,302/- has been paid to the other labourers on which the provision of TDS is not applicable.

As per order sheet entry dated 24.12.2009, the assessee was asked to file the details regarding the labour payments on which no TDS has been deducted which are supported only by self made vouchers. The authorized representative of the assessee company attended on 29.12.2009 and filed a reply to the show cause. The reply has been considered but is not found to be fully accpetable.

The assessee has incurred expenditure of Rs. 3,05,68,302/- in respect of labour payments on which the TDS has not been deducted. The assessee has only submitted the self made vouchers in support of its claim. As the assessee has not filed any other evidence regarding the labour payment but looking at nature of business of the assessee company a lump sum addition of Rs. 25,60,000/- @ 8% of the toatl labour payment is made to the assessee company.

(Total disallowance of Rs. 25,60,000/-)”

10. From the above, it can be seen that the Assessing Officer was acutely conscious about the petitioner not having deducted tax on labour payment charges of Rs. 3.05 crores and the petitioner’s contention that it was so done because provision for TDS was not applicable. He was not convinced by such explanation. He, however, for some strange reasons did not apply the provision of Section 40(a)(ia) of the Act instead made ad-hoc disallowance of Rs. 25,60,000/- @ 8% of the total labour payment charges.

11. Whatever be the legality of such assessment, fact remains that, in the scrutiny assessment, the Assessing Officer had thoroughly and fully scrutinized the assessee’s claim of deduction of labour expenditure. To the extent he was inclined to disallow the same, he did so. By no stretch of imagination it can be stated that the issue was not at large before the Assessing Officer in the original scrutiny assessment. Any reexamination of such a question at this stage would only amount to change of opinion. Remedy of reopening the assessment, therefore, was simply not available. In the decision of the Supreme Court in case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 the Apex Court observed as under:

“On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words “reason to believe”, Parliament re-introduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer.”

12. If the Revenue was of the opinion that the Assessing Officer erroneously and to the prejudice of the interest of the Revenue allowed certain claim, in a given situation, it would have been open for the appropriate authority to exercise revisional powers. However, once the claim was fully examined, power of reopening was simply not available.

13. In the result, impugned noticed dated 30.03.2012 is quashed. Petition is allowed and disposed of accordingly.

[Citation : 362 ITR 67]