Commissioner Of Income Tax-Ii v. Living Media India Ltd

THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 26.04.2013 +ITA 168/2013 COMMISSIONER OF INCOME TAX-II ..... Appellant versus LIVING MEDIA INDIA LTD ..... Respondent Advocates who appeared in this case:For the Appellant: Mr N.P. Sahni, AdvocateFor the Respondent: Mr Salil Aggarwal and Mr R.P. Mall, Advocates. CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE VIBHU BAKHRU JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1.This appeal by the revenue under Section 260A of the Income Tax Act,1961 is directed against the order passed by the Income Tax Appellate Tribunalon 01.08.2012 in ITA No. 4406/Del/11 relating to the assessment year 2006-07. 2.The facts of the case are that the assessee had filed its return of income on29.11.2006. The assessment order was framed by the Assessing Officer underSection 143(3) of the said Act on 26.12.2008.On 19.01.2010 a notice underSection 148 of the said Act was issued by the Assessing Officer seeking toreopen the assessment which was earlier completed on 26.12.2008.The purported reasons for reopening which had been recorded on 19.01.2010 were asunder:- “01. Assessment in this case was completed under section 143(3) on26.12.2008 at an income of ` 16,73,26,015/- as against the returnedincome of ` 16,67,22,015/-.Scrutiny of income tax assessmentrecords revealed that in the computation of income the assessee haddeducted ` 1,87,41,755/- on account of provision for doubtful debtsno longer required written back but in P&L account this amount wasnot added to the other income.The mistake resulted in underassessment of income by ` 1,87,41,755/- involving tax effect of` 63,08,473/-.26.12.2008 at an income of ` 16,73,26,015/- as against the returnedincome of ` 16,67,22,015/-.Scrutiny of income tax assessmentrecords revealed that in the computation of income the assessee haddeducted ` 1,87,41,755/- on account of provision for doubtful debtsno longer required written back but in P&L account this amount wasnot added to the other income.The mistake resulted in underassessment of income by ` 1,87,41,755/- involving tax effect of` 63,08,473/-. 02. In view of the above, I have reasons to believe that the income of` 1,87,41,755/- chargeable to tax has escaped assessment within themeaning of section 147/148 of the Income Tax Act, 1961.” 3.From the above extract, it is evident that the purported reasons pertain tothe issue of provision for doubtful debts. The allegation was that the assessee haddeducted ` 1,87,41,755/- on account of the said provision for doubtful debts butin the Profit & Loss Account the said amount had not been added to the taxableincome. It was contended that this resulted in under assessment of income by` 1,87,41,755/-, involving a tax liability of ` 63,08,473/-. 4.According to the learned counsel for the respondent/assessee, after about 9months additional reasons were supplied by the Assessing Officer to therespondent/assesseewhichwasreceivedbytherespondent/assesseeon29.10.2010. Those additional reasons were as under:- “Additional Reasons recorded under section 147 of the Act. 01Assessment in this case was completed under section 143(3) on26.12.2008 at an income of ` 16,73,26,015/- as against thereturned income of ` 16,67,22,015/-.Scrutiny of income taxassessment records revealed that:-26.12.2008 at an income of ` 16,73,26,015/- as against thereturned income of ` 16,67,22,015/-.Scrutiny of income taxassessment records revealed that:- 4.According to the learned counsel for the respondent/assessee, after about 9months additional reasons were supplied by the Assessing Officer to therespondent/assesseewhichwasreceivedbytherespondent/assesseeon29.10.2010. Those additional reasons were as under:- “Additional Reasons recorded under section 147 of the Act. 01Assessment in this case was completed under section 143(3) on26.12.2008 at an income of ` 16,73,26,015/- as against thereturned income of ` 16,67,22,015/-.Scrutiny of income taxassessment records revealed that:-26.12.2008 at an income of ` 16,73,26,015/- as against thereturned income of ` 16,67,22,015/-.Scrutiny of income taxassessment records revealed that:- (a) Assessee had long term capital gain of ` 14,34,71,150/-,therefore, balance unabsorbed depreciation of ` 6,85,19,358/-(` 8,95,82,795/- minus ` 2,10,63,437/-) should also have beenset off from long term capital gain. But the same amount wasnot set off from the long term capital gain.The mistakeresulted in excess carry forward of unabsorbed depreciation of` 6,85,19,358/- involving potential tax effect of ` 76,87,873/-.therefore, balance unabsorbed depreciation of ` 6,85,19,358/-(` 8,95,82,795/- minus ` 2,10,63,437/-) should also have beenset off from long term capital gain. But the same amount wasnot set off from the long term capital gain.The mistakeresulted in excess carry forward of unabsorbed depreciation of` 6,85,19,358/- involving potential tax effect of ` 76,87,873/-. (b) The Assessing Officer had disallowed ` 16,23,073/- in relatingto expenditure under section 14A related to exempt dividendincome of ` 3,54,28,042/- instead of correct figure of` 3,17,48,567/- as per the provisions of section 14A read withRule 8D. The mistake resulted in under assessment of incomeof ` 3,02,90,115/- involving tax effect of ` 1,28,33,604/-.to expenditure under section 14A related to exempt dividendincome of ` 3,54,28,042/- instead of correct figure of` 3,17,48,567/- as per the provisions of section 14A read withRule 8D. The mistake resulted in under assessment of incomeof ` 3,02,90,115/- involving tax effect of ` 1,28,33,604/-. 02 In view of the above, I have reasons to believe that the income of` 6,85,19,358/- and ` 3,02,90,115/- aggregating to ` 9,88,09,473/-chargeable to tax has escaped assessment within the meaning ofsection 147/148 of the Income Tax Act, 1961.”` 6,85,19,358/- and ` 3,02,90,115/- aggregating to ` 9,88,09,473/-chargeable to tax has escaped assessment within the meaning ofsection 147/148 of the Income Tax Act, 1961.” 5.Thereafter, the respondent/assessee submitted its objections which wererejected by virtue of an order dated 26.11.2010 and thereafter the assessmentorder under Section 147/143(3) of the said Act was passed on 08.12.2010. 6.While it is clear that the reasons which were recorded on 19.01.2010 onlyreferred to the issue of doubtful debts, the additional reasons which wereallegedly recorded subsequent to the issuance of the notice under section 148 ofthe said Act included the issues of unabsorbed depreciation and disallowanceunder section 14A of the said Act. As per the assessment order dated 08.12.2010,the Assessing Officer made additions in respect of bad debts, unabsorbeddepreciation and disallowance under section 14A. The Commissioner of IncomeTax (Appeals), while upholding the issuance of notice under section 148 and theproceedings under section 147 of the said Act, deleted the addition in respect ofbad debts as also the disallowance under section 14A of the said Act. However, the Commissioner of Income Tax (Appeals) held in favour of the revenue andconfirmed the addition on account of the issue with regard to unabsorbeddepreciation. the Commissioner of Income Tax (Appeals) held in favour of the revenue andconfirmed the addition on account of the issue with regard to unabsorbeddepreciation. 7.Both the revenue and the assessee filed the appeals before the Tribunalbeing ITA Nos. 4399/Del/2011 and 4406/Del/2011. The revenue was aggrievedby the finding of the Commissioner of Income Tax (Appeals) with regard to thedeletion on account of the issue pertaining to bad debts. In so far as, the assesseewas concerned, its appeal was directed against the findings of the Commissionerof Income Tax (Appeals) whereby the proceedings under Section 147/148 of thesaid Act were held to be valid and the revenue’s contention with regard to theunabsorbed depreciation had been accepted. 8.The Tribunal, hearing both the appeals, passed a common order disposingof the same by virtue of the impugned order dated 01.08.2012.The Tribunaldismissed the revenue’s Appeal with regard to the issue of bad debts and allowedthe assessee’s appeal on both counts, namely, that the proceedings initiated underSection 147/148 of the said Act were invalid as also on the plea of unabsorbeddepreciation. The present appeal filed by the revenue pertains to the assessee’sappeal before the Tribunal, that is, ITA No. 4406/Del/2011. The present appealdoes not relate to the rejection of the revenue’s appeal by the Tribunal. In otherwords, the present appeal is not concerned with the issue of bad debts whicharose only in the case of revenue’s appeal before the of Tribunal. The revenue is,therefore, in appeal before us against the finding of the Tribunal that theproceedings under Section 147/148 of the said Act were invalid and that thecarried forward unabsorbed depreciation could not be set off against the longterm capital gains. 9.Having heard the counsel for the parties, the first point which needs to beexamined is whether the proceedings under Section 147/148 were validlyinitiated or not.We have already noticed above that the purported reasonsrecorded on 19.01.2010 only contain the issue with regard to bad debts. It is onlysubsequently that, sometime in October 2010, additional reasons were recordedwith regard to the issue pertaining to unabsorbed depreciation and thedisallowance under Section 14A of the said Act.In our view, the additionalreasons could not have been recorded. The notice under Section 148 would standor fall depending upon the reasons prior to the issuance of the notice.In thepresent case, according to the learned counsel for the respondent/assessee, nonotice under Section 148 of the said Act has been issued pertaining to thepurported additional reasons which were allegedly recorded sometime in October2010 and served upon the assessee on 29.10.2010.Therefore, the additionalreasons cannot be looked into for the purposes of determining the validity of theproceedings initiated under the notice dated 19.01.2010 issued under Section 148of the said Act. 10.That being the position, the only thing that has to be seen is whether thereasons recorded on 19.01.2010 could, at all, form the basis of reopening of anassessment under Section 148 of the said Act. One point is clear, in that so far asthe issue of bad debts is concerned the present appeal is not concerned with it andtherefore, the deletion of the addition made on account of bad debts has becomefinal. Until and unless, there was an addition on the basis of the original reasons,no other additions could be made in view of the expression “and also” used inExplanation 3 to Section 147. This was the subject matter of the decision of theBombay High Court in the case ofCIT v. Jet Airways: 331 ITR 236 (Bom).This was followed by this Court inRanbaxy Laboratories Limited v. CIT: 336ITR 136 (Delhi) and also inCIT v. Software Consultants: 341 ITR 240 (Delhi). It was also subject matter of a recent decision of this court in the case ofCIT v.Cheil Communications India Pvt. Ltd.: ITA No. 578/2012 decided on17.04.2013. Therefore, no additions in absence of any addition on the issue ofbad debts could have been made by the Assessing Officer. It was also subject matter of a recent decision of this court in the case ofCIT v.Cheil Communications India Pvt. Ltd.: ITA No. 578/2012 decided on17.04.2013. Therefore, no additions in absence of any addition on the issue ofbad debts could have been made by the Assessing Officer. 11.Apart from this, we find that the initiation of the proceedings underSection 147 of the said Act were also bad as has been rightly observed by theTribunal as under:- “14.In the present case, the assessment has been completed u/s143(3) originally. The details in respect of bad debts were filed andthereafter the assessment was completed. Therefore, it cannot be saidthat Assessing Officer has not applied his mind. Even otherwise, aswe have discussed above in detail, no such claim on account ofprovision for bad debts has been claimed by the assessee. From wherethis figure has been picked by the Assessing Officer it is not known.Even during the course of appellate proceedings, the Bench asked tothe departmental representative that at least it should be on record thatfrom where he picked the figure on account of provision for bad debtthat assessee had claimed this deduction. Copy of balance sheet alongwith Schedule 16 is placed on record and as per Schedule 16, the onlyclaims have been made of Rs 46 lacs and odd. Reconciliation chartwas filed before Assessing Officer. From that also it is appearing thatassessee had not claimed any deduction on account of provision forbad debt.Ld. CIT(A) has considered this aspect and has given afinding of fact that assessee had not claimed any deduction on thisaccount and therefore he deleted the addition. No doubt the AssessingOfficer can reopen the assessment by exercising jurisdiction u/s 147but there should be some material for assuming the jurisdiction and inrecording the reasons there should be some reason to believe and thatreason to believe can be based on any material. From the record of theassessment completed originally no where it is coming out thatassessee had claimed any deduction on account of provision for baddebt. Therefore, in our considered view the Assessing Officer assumedjurisdiction without any material and therefore it cannot be said that the Assessing Officer has assumed valid jurisdiction. Accordingly, wehold that there was no valid jurisdiction for recording reasons andaccordingly we quash the assessment.For the sake of clarificationbefore issuing notice u/s 148, the reasons recorded by AssessingOfficer were on account of only for provision of bad debt, copy ofwhich is placed at page 78 of the paper book. Other additional reasonswere recorded during assessment proceedings. Since we have alreadyheld that assumption of jurisdiction, recording of reasons originallywere not valid, therefore, entire assessment is quashed.” 12.The Tribunal also noted that the respondent/assessee had not claimed thesaid amount of ` 1,87,41,755/- in as much as the said amount had been writtenback by the assessee and the total deduction claimed by the respondent/assesseeunder the head ofdoubtful debts written off were only to the extent of` 46,37,814/- which had not been denied by the Assessing Officer in the originalassessment framed on 26.12.2008. In fact, the entire issue of the provision forbad debts was discussed by the Assessing Officer at the time of originalassessment and, therefore, the Tribunal was also right in holding that the attemptto re-assess was based on a mere change of opinion. 12.The Tribunal also noted that the respondent/assessee had not claimed thesaid amount of ` 1,87,41,755/- in as much as the said amount had been writtenback by the assessee and the total deduction claimed by the respondent/assesseeunder the head ofdoubtful debts written off were only to the extent of` 46,37,814/- which had not been denied by the Assessing Officer in the originalassessment framed on 26.12.2008. In fact, the entire issue of the provision forbad debts was discussed by the Assessing Officer at the time of originalassessment and, therefore, the Tribunal was also right in holding that the attemptto re-assess was based on a mere change of opinion. 13.With regard to the additional reasons which were recorded subsequent tothe issuance of notice under Section 148 of the said Act, we have alreadyobserved that this could not have been done by the Assessing Officer.Thevalidity of the proceedings initiated upon a notice under Section 148 of the saidAct would have to be judged from the stand point of the reasons which existed atthe point of time when the Section 148 notice was issued. The additional reasonscannot be provided or recorded subsequent to the issuance of notice underSection 148.It is, of course, open to the Assessing Officer, if some otherinformation comes within his knowledge to issue another notice under Section148 for different reasons. But that is not the case here. On the basis of the very same notice issued under Section 148, the Assessing Officer has recordedadditional reasons subsequent to the issuance of notice and this is impermissiblein law. 14.Before parting with this matter, we would also like to point out that theAssessing Officer has not dealt with this matter in the proper manner.In theorder rejecting the objections as also in the assessment order under Section147/143(3) dated 08.12.2010 the Assessing Officer has stated the reasons forreopening the income tax assessment to be as under:- “REASONS RECORDED BY THE ASSESSING OFFICER BEFOREISSUE OF NOTICE U/S 148: The reasons for reopening the income tax assessment of the companyfor assessment year 2006-07, is furnished hereunder:- “Assessment in this case was completed under section 143(3) on26.12.2008 at an income of ` 16,73,26,015/- as against the returnedincome of ` 16,67,22,015/-. Scrutiny of income tax assessment recordsrevealed that:- (a) Assessment in this case was completed under section 143(3) on26.12.2008 at an income of ` 16,73,26,015/- as against the returnedincome of ` 16,67,22,015/-.Scrutiny of income tax assessmentrecords revealed that in computation of income of the assessee haddeducted ` 1,87,41,755/- on account of provision for doubtful debtsno longer required written back but in the P & L account thisamount was not added to the other income. This mistake resultedin under assessment of income by ` 1,87,41,755/- involving taxeffect of ` 63,08,473/-.26.12.2008 at an income of ` 16,73,26,015/- as against the returnedincome of ` 16,67,22,015/-.Scrutiny of income tax assessmentrecords revealed that in computation of income of the assessee haddeducted ` 1,87,41,755/- on account of provision for doubtful debtsno longer required written back but in the P & L account thisamount was not added to the other income. This mistake resultedin under assessment of income by ` 1,87,41,755/- involving taxeffect of ` 63,08,473/-. In view of the above, I have reasons to believe that the income of` 1,87,41,755/- chargeable to tax has escaped assessment within themeaning of section 147/148 of the Income Tax Act, 1961.` 1,87,41,755/- chargeable to tax has escaped assessment within themeaning of section 147/148 of the Income Tax Act, 1961. In view of the above, I have reasons to believe that the income of` 1,87,41,755/- chargeable to tax has escaped assessment within themeaning of section 147/148 of the Income Tax Act, 1961.` 1,87,41,755/- chargeable to tax has escaped assessment within themeaning of section 147/148 of the Income Tax Act, 1961. (b) Assesseehadlongtermcapitalgainof`14,34,71,150/-,therefore, balance unabsorbed depreciation of ` 6,85,19,358/-(` 8,95,82,795/- minus ` 2,10,63,437/-) should also have been setoff from long term capital gain. But the same amount was not settherefore, balance unabsorbed depreciation of ` 6,85,19,358/-(` 8,95,82,795/- minus ` 2,10,63,437/-) should also have been setoff from long term capital gain. But the same amount was not set off from the long term capital gain. The mistake resulted in excesscarry forward of unabsorbed depreciation of ` 6,85,19,358/-involving potential tax effect of ` 76,87,873/-. (c) The Assessing Officer had disallowed ` 16,23,073/- in relating toexpenditure under section 14A related to exempt dividend incomeof ` 3,54,28,042/- instead of correct figure of ` 3,17,48,567/- asper the provisions of section 14A read with Rule 8D. The mistakeresulted in under assessment of income of ` 3,02,90,115/- involvingtax effect of ` 1,28,33,604/-.expenditure under section 14A related to exempt dividend incomeof ` 3,54,28,042/- instead of correct figure of ` 3,17,48,567/- asper the provisions of section 14A read with Rule 8D. The mistakeresulted in under assessment of income of ` 3,02,90,115/- involvingtax effect of ` 1,28,33,604/-. In view of the above, I have reasons to believe that the income of` 6,85,19,358/- and ` 3,02,90,115/- aggregating to ` 9,88,09,473/-chargeable to tax has escaped assessment within the meaning ofsection 147/148 of the Income Tax Act, 1961.” 15.It will be seen from the above extract that what the Assessing Officer haddone was that he had combined the original recorded reasons and the additionalreasons and shown it as one set of reasons.There is no document on recordwhich purports to be the reasons wherein the above-extracted three sub-paragraphs (a), (b) and (c) have been set out together.In fact, the purportedrecorded reasons dated 19.01.2010 comprise of two paragraphs numbered as “01”and “02”.The purported additional reasons also comprise of two paragraphs“01” and “02”. It is only in the additional reasons, in paragraph “01” that twosub-paragraphs are referred to as “(a)” and “(b)”. It is, therefore, clear that theAssessing Officer has conjured up a different set of reasons by combining theoriginal reasons and the additional reasons allegedly recorded sometime inOctober 2010. This is impermissible and does not behove of the AssessingOfficer who is supposed to be fair to the department as also to the assessee and tobe honest to the record! 16.The Assessing Officer was also wrong in stating that the reasons asindicated by him involving three issues had been recorded before issuance of the notice under Section 148.To make it clear, the reasons recorded prior to theissuance of the notice under Section 148 pertained only to the issue of bad debts.The other purported reasons pertaining to the issues of unabsorbed depreciationand disallowance under Section 14A of the said Act were, admittedly, recordedafter the issuance of notice under Section 148. 17.In view of the foregoing, no interference with the impugned order by theTribunal is called for as it does not raise any substantial question of law. Wemake it clear that, in view of the fact that we found that the Tribunal was right inconcluding that the proceedings under Section 147/148 were itself bad, we havenot examined the merits of the issue with regard to the carry forward ofunabsorbed depreciation. 18.The Appeal is dismissed. There shall be no order as to costs. BADAR DURREZ AHMED, J VIBHU BAKHRU, J APRIL 26, 2013‘RK’