Referred Sections:
Section 147/148 of the Act.
Section 40 (a) (ia) of the Act
Section 143(3) of the Act?
Section 143(2) and 142(1) of the Act
Section 151 (1) Income Tax Act. "
Section 19 of Bihar Finance Act,
Section 14A of the Act
Referred Cases / Judgments:
Larsen and Toubro v. State of Jharkhand (2017) 103 VST 1 (SC)
Adani Infrastructure & Developers (P.) Ltd. v. ACIT (2019) 101 taxmann.com 256 (Gujarat)
$~38
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 1444/2018
PR. COMMISSIONER OF INCOME TAX DELHI-21..... Appellant
Through: Mr.Ajit Sharma, Sr. Standing Counsel
with Ms.Adiba Mujahid and Ms.Priya
Sarkar, Advocates.
versus
LALIT BAGAI ..... Respondent
Through: Mr.Gagan Kumar with Mr.Amit
Kaushik, Advocates.
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE TALWANT SINGH
ORDER
% 21.08.2019
Dr. S. Muralidhar, J.:
1. The Revenue is in appeal against an order dated 9th March 2018 passed by
the Income Tax Appellate Tribunal (,,ITAT) in ITA No.5833/Del/2015 for
Assessment Year (,,AY) 2006-07.
2. The issue sought to be urged by the Revenue is whether the ITAT was
justified in quashing the reassessment proceedings under Section 147 of the
Act on the ground of change of opinion on the applicability of Section 40 (a)
(ia) of the Act even when the Assessing Officer (,,AO) had not expressed
any opinion on the applicability of such provision during the original
ITA 1444/2018 Page 1 of 10
assessment proceedings under Section 143(3) of the Act?
3. The admitted factual position is that for the AY in question the return of
income was filed by the Assessee on 31st October 2006 declaring an income
of Rs.1,02,35,913/-. The return was picked up for scrutiny and notice to the
Assessee was issued by the Assessing Officer (,,AO) under Section 143(2)
and 142(1) of the Act on 19th October 2007 along with a detailed
questionnaire to the assessee.
4. Consequent thereto an assessment order was passed on 28th March 2008
assessing the business income of Assessee at Rs.71,66,970/- and taxable
long term capital gains(LTCG) at Rs.37,85,502/-. In the course of the
framing of the assessment the AO disallowed wage expenses to the extent of
1% of Rs.4,71,86,794/- which equals to Rs.4,71,867/- to cover up the
leakage in the income. There was also disallowance of miscellaneous
expenses.
5. Thereafter, on 28th March 2008 notice was issued to the Assessee under
Section 147/148 of the Act. In the order of reassessment dated 28th March
2014 the AO disallowed Rs.4,89,15,024/- under Section 40 (a) (ia) on the
ground that the Assessee had not deducted TDS on the payments made to
the labour. The Assessee was also found to have made payment of job work
charges amounting to Rs.84,03,444/- and rent charges of Rs.31,83,736/-.
However, TDS had only been deducted on a sum of Rs.78,84,248/-.
6. Aggrieved by the above order of the AO the Assessee filed an appeal
ITA 1444/2018 Page 2 of 10
before the Commissioner of Income Tax (Appeals) [CIT (A)]. By an order
dated 7th August 2015 the CIT (A) allowed the appeal of the Assessee
essentially on the ground that the reopening by the AO was based on change
of opinion.
7. The Revenues appeal against the aforementioned order of the CIT (A)
was dismissed by the ITAT by the impugned order and that is how the
Revenue is in appeal before this Court.
8. On 14th December 2018 while directing notice to issue in the present
appeal the following order was passed by this Court:
"2. By the impugned order dated 19.2.2018, Income Tax
Appellate Tribunal ( Tribunal for short) has affirmed the
finding given by the Commissioner of Income Tax (Appeals)
that this was a case of change of opinion; and, therefore, the
reassessment proceedings initiated against the respondent --
Lalit Bagai for the assessment year 2006-07 were contrary and
bad in law.
3. It is an accepted and admitted position that the original tax
return of the respondent/assessee for the assessment year
2006-07 was taken up for scrutiny assessment. Vide
assessment order under Section 143 (3) dated 28th March,
2008, additions were made including dis-allowance of one per
cent of the wage expenses of Rs.4,71,86,794, i.e. Rs.4,71,867/-
to cover up leakage or wrongful claims.
4. At this stage itself, we may record, that the
respondent/assessee had claimed that he had incurred wage
expenses of Rs.4.71 crores based upon the muster roll which
was relied upon before Assessing Officer.
5. Subsequently, re-assessment proceedings under Section 147
ITA 1444/2018 Page 3 of 10
read with Section 148 of the Income Tax Act were initiated by
issuance of notice to the respondent/assessee after four years
from the end of the relevant assessment year recording the
following reasons:
"Reasons for reopening the case u/s 147.
The assessment in this case was completed u/s 143(3) on
28.3.2008 at an income of Rs. 1,09,52,472/-. On
examination the assessee has not shown receipts in
Profit and Loss account of Rs.2,61,84,628/- which
appear inform 16 of the relevant previous year, thereby
showing less income.
Further on perusal of records it is also seen that the
assessee has not deducted any tax on payment of
Rs.5,27,52,272/- payment. Therefore, the provisions of
section u/s 40 (a) (ia) attract on the above mention
amount.
The assessee neither at time of Assessment proceedings
nor at the time offling of returns of income disclosed the
above mentioned facts.
In view of these facts and after due application of mind,
I have reason to believe that income chargeable to tax
has escaped assessment for the A.Y. 2006-07 for the
reason of failure on the part of the assessee to disclose
fully and truly all mentioned facts necessary for his
assessment. Therefore, case is fit for reopening the
assessment u/s 147/148 of IT Act. The prior sanction of
CIT is required before issue of notice u/s 148 of IT Act
as per provision of Section 151 (1) Income Tax Act. "
6. The second reason/ground recorded above refers to alleged
failure on the part of the respondent/assessee to deduct tax at
source on payment of Rs.5.27 crores and attracting provisions
of Section 40(a)(ia) of the Act.
ITA 1444/2018 Page 4 of 10
7. Contentions of the counsel for the appellant/Revenue is that
this amount of Rs.5.27 crores includes labour charges of
Rs.4.71 crores, job work charges of Rs.84 lakhs and rent of
Rs.31.83 lakhs. He submits that while it is possible to argue
that payment to labour i.e. wages was examined in the first
round, the payments made for job work and rent were not
examined and verified in the first round. He submits that this
aspect has escaped notice of the Commissioner of Income Tax
(Appeals) and the Tribunal.
8. Issue notice, returnable on 18th March, 2019.
9. The appellant would also produce the relevant assessment
records including the records of the first assessment."
9. This Court has heard the submissions of learned counsel for the parties. It
is seen that the entire exercise of reopening of the assessment was triggered
by objections raised by the audit party. The first of these objections was
contained in the letter dated 6th August 2009 addressed by the Deputy
Commissioner of Income Tax CP-1 (Audit-1) to the Deputy Commissioner
of Income Tax (DCIT) Circle 38(1), New Delhi calling for comments on the
audit observations enclosed with the letter. The said audit observations
referred to the payment of labour charges, job work and rent for hiring.
10. On 10th May 2010 the Assistant Commissioner of Income Tax Circle
38(1) i.e. the Assessing Officer (,,AO) replied to the above audit objection s.
A perusal of the said reply reveals that the issue of non-deduction of TDS on
labour charges, job work and rent were specifically addressed. The facts
and figures were set out by the AO and it was concluded that ,,the Assessee
had correctly accounted for its turnover also by the Income Tax Laws.
ITA 1444/2018 Page 5 of 10
Accordingly, the AO requested the ACIT audit to treat the said issue as
,,settled.
11. For the second time on 28th November 2011 yet another letter was
addressed by the CIT Audit to the AO calling for an explanation. On 7th
December 2011 the AO sent again addressing in detail the above issue.
12. On 11th December 2012 for the third time the Income Tax Officer (Audit
1) wrote to the AO stating as under:
"To
The Asstt. Commissioner of Income Tax
Cir-38(I),
New Delhi.
Sir/Madam,
Sub: -Audit Objection in the case of Sh. Lalit Bagai for
Asst. Year 2006-07-reg.
Please refer to your letter F. No. ACIT/Cir-38(I) 1201 1-12
dated 07.12.2011 on the above mentioned subject.
As the explanation/ reply in respect of the case above is not
acceptable. I am directed to request you to take the necessary
remedial action in this case as required earlier as per the audit
objection raised.
You are requested to please give your reply & complete report
within a week of receipt of this letter."
13. On 28th March 2013 the AO wrote to the DCIT (Audit-1) and specific to
the present Assessee for the AY 2006-07 it was stated as under:
ITA 1444/2018 Page 6 of 10
"1. Lalit Bagai (PAN AAAPB2885L) A. Y - 2006-07
After receiving the audit objection, the case has been
considered for reopening the assessment u/s 147/148 of IT
Act. After approval of Ld. Commissioner of Income Tax,
Delhi-XIII New Delhi, notice u/s 148 has already been issued.
As the necessary remedial action has been taken, the audit
objection may be treated as settled."
14. It is further seen that on 17th February 2014 the Joint Commissioner of
Income Tax (JCIT) (Audit-1) wrote to the AO asking that the outcome of the
reassessment proceedings in respect of the issue for AY 2006-07 and the
remedial action for AY 2007-08 ,,may be intimating to this office, in proper
channel. It is in the above context that the ACIT Circle 38(1) proposed to
reopen the assessment by initiating the steps in that regard on 26 th March
2013.
15. It is clear from the above correspondence that there was no independent
decision arrived at by the AO to form ,,reasons to believe for reopening of
the assessment after being satisfied that there was an escapement of income.
The above correspondence also indicates that not once but on two separate
occasions the AO clearly formed the opinion that this was not a case fit for
reopening of the assessment and that the AO was constrained,
notwithstanding that opinion, to reopen the assessment on the express
instructions issued to him vide letter dated 11th December 2012 of the Addl.
CIT Audit-1 referred to hereinbefore.
16. In Larsen and Toubro v. State of Jharkhand (2017) 103 VST 1 (SC)
the Supreme Court was dealing with the reopening of assessment under
ITA 1444/2018 Page 7 of 10
Section 19 of Bihar Finance Act, 1981 in respect of the return of a registered
dealer for the period 1991-92. Section 19 of the BFA is in para materia with
Section 147 of the Act. There again the reopening required the forming of an
independent opinion by the AO regarding escapement of turnover for the
purpose of tax. On the facts of that case, having examined the note of the
audit party and the correspondence between AO and the audit party the
Supreme Court came to the following conclusion in para 29 of the order
which reads as under:
"29. From a perusal of the last paragraph of the
aforementioned report of the audit party, it is clear that the
Assessing Officer was of the opinion that as the goods had not
been transferred to Appellant-Company but had been
consumed, so it does not come under the purview of taxation.
In other words, the Assessing Officer was not satisfied on the
basis of information given by the audit party that any of the
turnover of the Appellant-Company had escaped assessment so
as to invoke Section 19 of the State Act. From the above, it
also appears that the assessing officer had to issue notice on
the ground of direction issued by the audit party and not on his
personal satisfaction which is not permissible under law."
17. In Adani Infrastructure & Developers (P.) Ltd. v. ACIT (2019) 101
taxmann.com 256 (Gujarat) the Gujarat High Court was dealing with a
similar case where the notice under Section 148 of the Act for reopening of
the assessment was challenged on the ground that it was not based on any
independent opinion arrived at by the AO but merely based on the
objections of an audit party. The relevant portion of the said judgment reads
as under:
"8. The learned Senior Standing Counsel also produced for the
perusal of the court the original file containing the audit query.
ITA 1444/2018 Page 8 of 10
A perusal of the file reveals that the Assessing Officer has not
accepted the objections raised by the audit party and has given
his reasons for the same and has further stated that he had
considered the applicability of provisions of section 14A of the
Act and was satisfied in adopting 0.5% of average value of
investment for disallowance under section 14A of the Act. He
was, accordingly, of the view that the objection raised by the
audit party could not be accepted and is required to be
dropped.
9. A perusal of the reasons recorded shows that the assessment
for the year under consideration is sought to be reopened on
the ground that the disallowance of expenditure under section
14A of the Act read with rule 8D of the rules had not been
correctly worked out. On the other hand, the Assessing
Officer, after considering the audit objections, has not
accepted the same has stated that after considering the
applicability of section 14A of the Act, he was satisfied with
the disallowance made, despite which the impugned notice has
been issued seeking to reopen the assessment on the very
ground to which he has objected, which is indicative of the
fact that the reopening of assessment is not based on the
satisfaction of the Assessing Officer but on the audit
objections.
10. Thus, the record of the case clearly reveals that the
Assessing Officer has not accepted the objections raised by the
audit party and on the contrary, has objected to such objections
by communicating internally as referred to hereinabove.
Evidently therefore, the Assessing Officer has not formed any
independent belief that the income chargeable to tax has
escaped assessment and on the contrary has stated that he had
considered the applicability of provisions of section 14A of the
Act and was satisfied in adopting 0.5% of average value of
investment for disallowance under section 14A of the Act.
Evidently, therefore, the notice under section 148 of the Act
has merely been issued on the basis of the audit objection
without the Assessing Officer having formed the requisite
ITA 1444/2018 Page 9 of 10
belief regarding escapement of income as contemplated under
section 147 of the Act. It is by now well settled that the
assessment cannot be reopened merely on the basis of an audit
report without the Assessing Officer independently forming
the belief, may be on the basis of such report, that income
chargeable to tax has escaped assessment. The above referred
decision would, therefore, be squarely applicable to the facts
of the present case. The impugned notice issued by the
respondent under section 148 of the Act being based merely
upon the audit objection and not because the Assessing Officer
had reason to believe that any income chargeable to tax has
escaped assessment, cannot be sustained."
18. In the present case also the Court finds that the AO had in fact applied
his mind to the audit party objection and formed a clear opinion that there is
no justification for reopening of the assessment and yet it is only on the
insistence of the Addl. CIT Audit that the AO changed his opinion and
decided to reopen the assessment. Consequently, the reopening of the
assessment in the present case, which was based on a change of opinion was
vitiated in law as it did not satisfy the legal requirement of Section 147 of
the Act.
19. In the circumstances, the view taken by the ITAT calls for no
interference. No substantial question of law arises, the appeal is dismissed.
S. MURALIDHAR, J.
TALWANT SINGH, J.
AUGUST 21, 2019
tr
ITA 1444/2018 Page 10 of 10
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