Delhi H.C : Where in original assessment and first reassessment, issue of expenditure on dealer’s commission was verified, a second reassessment was barred

High Court Of Delhi

Vodafone South Ltd. vs. Union Of India

Assessment Year : 2005-06

Section : 37(1), 147

Ravindra Bhat And R. V. Easwar, JJ.

W.P. (C) No. 1841 Of 2013

C.M. Appl. No. 3519 Of 2013

March  11, 2014

ORDER

S. Ravindra Bhat, J. – The petitioner (hereafter “Vodafone”) questions the legality of a reassessment notice (“the impugned notice”) issued by the respondents (“the Revenue”) under Section 148 of the Income Tax Act, 1961 (“the Act”) on 14-03-2012, for Assessment Year (“AY”) 2005-2006. It is undisputed that the reasons to believe that income had escaped assessment recorded by the revenue were disclosed to the assessee, for the first time, through a communication dated 01-10-2012.

2. The facts, necessary for deciding the present petition are that the assessee engages itself in the business as a telecom service provider. It filed its return for AY 2005-06 claiming a loss of Rs. 3,50,99,31,672/-. On 20-12-2007, the assessment order was finalized. The Assessing Officer (“AO”) added back some amounts out of the claim for commission expenses. This disallowance was on the basis of queries sought on this aspect, from the assessee, to back its claim. The assessee had claimed expenditure of Rs. 1,07,95,70,000/- (Rs. 95,84,20,000/- on account of dealer commission and Rs. 12,11,50,000/- as commission to others in the profit and loss account). During the assessment proceedings it was asked to file details of the commission expenses. It submitted that the commission was paid to the distribution chain appointed by it across its territory of operations and that the commission expenses included commission paid to prepaid/postpaid scheme distributors, promotional merchandise distributed to the customers and collection and credit commission. The AO was of the opinion that the material supplied during the assessment proceeding could not justify the entire claim for Rs. 107.95 crores, but was sufficient to warrant a deduction of 75% of that amount. The AO therefore, added back 25% of the said sum of Rs. 107.95 crores, i.e Rs. 26,98,92,500/- and brought it to tax.

3. On 03-03-2010, the Revenue issued a reassessment notice in respect of AY 2005-06. Upon being asked to furnish the reasons in support of the opinion for reopening assessment, the Revenue by its letter of 07-10-2010, cited four reasons which constituted valid “reasons to believe”. The first was that Section 145(2) of the Income Tax Act, 1961 provides that a provision made in the accounts for an accrued or known liability is an admissible deduction while other provisions do not qualify for deduction under the Act. In this regard, it was alleged that:

“1.1 The assessee had made a provision of Rs.2,34,65,038/- on account of Provision of WPC-License fee which was debited to the accounts. As the provision made was not an ascertained liability the amount should also have been disallowed and added back by the assessee to its income. The failure to do so resulted in over-assessment of Loss of Rs.2,34,65,038 involving potential tax effect of Rs.8586444.”

The second reason cited was that Section 47(1) of Act provides that any expenditure not being of a capital nature laid out or expended wholly or exclusively for the purpose of the business is allowable as deduction in computing income chargeable under the head ‘profit and gain of business and profession’. Therefore all expenditure incurred in relation to the business is allowable. The expenditure unrelated to the business was not allowable as deduction. In this context, the Revenue alleged that:

“2.2 The Assessee has paid commission to dealers and others of Rs.107,95,70,000/-. The assessee was asked by assessing Officer to furnish the confirmation to whom this commission was paid. The onus for proving the genuineness of the claim of expenditure lies on the assessee. If the commission would have been paid to parties by the assessee then TDS should have been deducted and deposited to the Government account which has not been done. The expenditure as a whole should have been disallowed and added back to the income of the assessee. This has resulted in incorrect carry forward of loss of Rs. 80,96,77, 500/- involving potential tax effect of Rs.29,62,81,239/-…”

The third ground was in respect of writing off of bad debts:

“3.1 During the relevant previous year an amount of Rs.5,08,60,000/- was credited to the profit and loss account in respect of provision for bad Debts written back and the same amount was also charged to P/L account as bad debts written off. Further, the assessee has again deducted the same amount in the computation of taxable income from provision for doubtful debts (net of write off).This has resulted in incorrect carry forward of loss of Rs.5,08,60,000/-“

The last ground alleged was that:

“4.1 The assessee has claimed depreciation amounting to Rs.6786,8051- at the rate of 25% on addition of Rs.27147218 as adjustment of foreign Exchange fluctuation in the assets (plant and machinery). As the amount represents intermediate exchange fluctuation not backed by the actual remittance, the depreciation of Rs.67,86,8051- claimed on the addition of Rs.271472181- on account of foreign exchange fluctuation should have been disallowed. This has resulted in incorrect allowance of depreciation amounting to Rs.67,86,805/-“

4. After considering the objections, the AO proceeded to frame the re-assessment order on 30-12-2010. The first, third and fourth grounds on the basis of which reassessment was opened, were upheld and amounts originally proposed to be added back, were in fact brought to tax. However, the re-assessment order was silent on the dealers’ commission to the tune of Rs. 107,95,70,000/-. The assessee had furnished a reply and materials to the AO, in the course of reassessment proceedings.

5. By the impugned second reassessment proceedings, the Revenue sought to re-open the assessment yet again. This time, again the very same grounds which formed the first reassessment notice (dated 03-03-2010) were reiterated. The assessee reiterated its objections and pointed out that the first reassessment order of 30th December 2010 had considered all these questions, and it resulted in certain disallowances being confirmed and added back. It was, therefore, stated in the assessee’s objections that the impugned second reassessment notice was unjustified in law. In this background, on 28-02-2013, the Revenue addressed a letter to the assessee, stating as follows:

“1. The assessee has paid commission to dealers of Rs.107,95,70,000/-. The assessee was asked by Assessing Officer to furnish the confirmation to whom this commission was paid. The onus for proving the genuineness of the claim of expenditure lies on the assessee and it has also been mentioned by the Assessing Officer in the Assessment Order that the fact that the assessee has not been able to prove the genuineness of these expenses and only shows that the assessee is reducing its income. It is also pertinent to mention here that on which basis only 25% of the expenditure was added back by the Assessing Officer is unjustified and against the interest of revenue. Thus, it is clear that the expenditure was not actually incurred by the assessee. If the commission would have been paid to parties by the assessee then TDS should have been deducted and deposited to the Government account which has been deducted and deposited by the assessee; Hence the expenditure as a whole should have been disallowed and added back to the income of the assessee. The mistake resulted in incorrect carry forward of loss of Rs. 80,96,77,500/- involving potential tax effect of Rs.29,62,81,239/-.”

6. Vodafone argues that the Revenue’s repeated attempts to re-open the question of dealers’ commission, on one ground or the other, are barred and untenable. Learned senior counsel for the petitioner relied on the replies and documents furnished to the AO during the original assessment under Section 143(3), and in answer to the first re-assessment notice, to say that all possible queries made and anticipated, were replied to. Even the issue of tax deducted from the commission paid or payable was an issue gone into. Consequently, the second reassessment notice, impugned in this case, really amounted to a review that the law did not permit, given the decisive nature of the ruling by the Supreme Court in CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561.

7. It was argued on behalf of the Revenue by Mr. Rohit Madan that the reassessment notice was, in the circumstances of this case, validly issued. Counsel stressed that the previous proceedings did not discuss or consider the question whether the commission paid to parties by the assessee should have led to TDS and deposited to the Government account. The previous order – made in reassessment proceedings- was bereft of discussion or findings. The expenditure as a whole should have been disallowed and added back to the assessee’s income. This mistake resulted in incorrect carry forward of loss of Rs.80,96,77,500/- involving potential tax effect of Rs.29,62,81,239/-. Thus, argued the counsel, the ex-facie lack of discussion constituted a valid reason to re-open the assessment. Counsel stressed that there is no bar as to the number of times that reassessment notices can be issued, provided the objective statutory conditions are satisfied in that regard.

8. What constitutes valid and justifiable grounds for re-opening of assessment is established. After Kelvinator of India Ltd. (supra), it is now acknowledged that a tax administrator would act within jurisdiction if notice of reassessment is issued in a given case, based on “tangible” or fresh material. Re-appraisal of previously assessed returns, based on a change of opinion or an improved understanding of the law, would not pass muster as the basis for a valid reassessment proceeding, because the law would not uphold such change of opinion as it amounts to an impermissible review. Equally, an erroneous previous view warranting exercise of revisional jurisdiction cannot authorize a valid reassessment notice.

9. In the present instance, the Revenue had concededly raked up the issue of commission paid to dealers in the first reassessment proceeding. That too was despite the AO having gone into the question and disallowed the amount in question to the extent of 10%. As to the obligation to deduct tax, it was the specific subject matter of enquiry during the first re-assessment proceeding, because the notice, inter alia, alleged that “..If the commission would have been paid to parties by the assessee then TDS should have been deducted and deposited to the Government account which has not been done. The expenditure as a whole should have been disallowed and added back to the income of the assessee.”In the assessee’s letter in response to the first reassessment notice dated 15-12-2010, inter alia, this precise aspect – as to details of commission paid to dealers, and supporting material in respect of TDS deducted, was referred to (this is found at pages 163-166 of the present petition paperbook). The assessee had relied on, and annexed copies of the reply to questionnaire and queries in the course of assessment proceedings, and annexed the response given at the time of assessment on 07-11-2007, as well as supporting documents. These were the subject of enquiry during the first reassessment proceeding. That the AO appears to have been satisfied about the explanation and, therefore, chosen not to bring to tax any amount on this aspect, is a matter of inference because in the first reassessment order, no addition was made on this score.

10. It is evident from the above discussion that during the assessment proceeding, and the first reassessment proceeding (pursuant to the earlier reassessment notice of 03-03-2010) the question of dealers’ commission as well as TDS on those amounts, had been gone into. The attempt to revisit this issue a third time, in the given circumstances of the case, is nothing but the tax authorities’ effort to overreach the law and resultantly a sheer harassment of the petitioner. The impugned notice and all further proceedings conducted pursuant to it are, therefore, without jurisdiction and hereby quashed. The writ petition is accordingly allowed but without any order on costs.

[Citation : 363 ITR 388]