Dr. Ajit Gupta v. Assistant Commissioner Of Income Taxrespondentthrough: Mr. Rahul Chaudhary, Senior Standingcounselwithmr.raghvendrasinghandmr.sharad Agarwal, Advocates

$~ *IN THE HIGHCOURTOF DELHIAT NEW DELHI 10.+W.P.(C) 924/2014 & CM 1873/2014 (for stay) DR. AJIT GUPTA Petitioner Through: Mr. Salil Kapoor with Mr. Sanat Rapoor,Ms.Ananya Kapoor, Mr.Sumit Lai Chandani andMr. Amn Vir Singh, Advocates. versus ASSISTANT COMMISSIONER OF INCOME TAXRespondentThrough: Mr. Rahul Chaudhary, Senior StandingCounselwithMr.RaghvendraSinghandMr.Sharad Agarwal, Advocates. 11 WITH W.P.(C) 1045/2014 i& CM 2151/2014(for stay) DR. AJIT GUPTAPetitioner Through:Mr. SalilKapoorwith Mr. SanatKapoor,Ms.AnanyaKapoor, Mr.Sumit Lai Chandani andMr. Arun Vir Singh, Advocates. versus ASSISTANT COMMISSIONER OF INCOME TAXRespondentThrough; Mr. Rahul Chaudhary, Senior StandingCounselwithMr.RaghvendraSinghandMr.Sharad Agarwal, Advocates. 12 + WITH W.P.(C) 3077/2015 & CM 5498/2015(for stay) DR. AJIT GUPTA Petitioner W.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015Page1of11 Through:Mr. SalilKapoorwithMr. SanatKapoor,Ms.AnanyaKapoor, ^.Sumit Lai Chandani andMr. Arun Vir Singh, Advocates. versus ASSISTANTCOMMISSIONEROF INCOMETAX COMMISSIONEROF INCOMETAXOF INCOMETAX INCOMETAXTAXRespondentThrough: Mr. Rahul Chaudhary,Senior StandingCounselwithMr.Raghvendra SinghandMr.Sharad Agarwal, Advocates. 13.+ AND W.P.(C)3078/2015&CM 5500/2015(forstay) DR. AJIT GUPTA Petitioner Through:Mr. SalilKapoorwithMr. SanatKapoor,Ms.Ananya Kapoor, Mr.Sumit Lai Chandani andMr. Arun Vir Singh, Advocates. versus ASSISTANTCOMMISSIONEROF INCOMETAX Respondent Through: Mr. Rahul Chaudhary,Senior StandingCounsel withMr.Raghvendra SinghandMr.Sharad Agarwal, Advocates. CORAM:JUSTICE S. MURALIDHARJUSTICE VIBHU BAKHRU ORDER%03.03.2016 CM No. 1874/2014tforexemption)in W.P. rci No. 924/2014CM No. 2152/2014(forexemntioniin W.P. fCI No.1045/2014 1. Exemptionsallowedsubjectto alljustexceptions. 2. The applicationsare disposedof. W.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015 2of11 W.p.(0 No. 924/2014 & CM No. 1873/2014 (for stav^W.P.(C) No. 1045/2014& CM No. 2151/2014(for stay)W.P.(C) No. 3077/2015& CM No. 5498/2015(for stay)W.P.(C) No. 3078/2015& CM No. 5500/2015(for stay) 3. Thesefour writpetitionsby Dr. Ajit Gupta,amedicalpractitionerwho isan Assessee, challengethe notices issued to the Assessee by the DeputyCommissionerof Income Tax ('DCIT'), Circle 37(1), New Delhi underSection 148 of the Income Tax Act, 1961 ('Act') seeking to reopen theassessmentfor AssessmentYears('AYs') 2006-07to 2009-10. 4. The Assesseefiled a returnof incomeon 31'^ October2006 for AY2006-07 which was picked up for scrutinyby the AssessingOfficer('AO'). Anassessmentorderwas passedby the AO under Section143(3)ofthe Act on22"''December2008 assessingthe taxableincomeat Rs.14,40,226as againstthe declaredincomeof Rs.12,35,268. 5. The Assesseefiled a return for AY 2007-08 on 3D' October2007 whichagain was picked up for scrutiny.An assessmentorder was passed on 29""December2009 assessingthe taxableincomeat Rs.36,95,120as againstthedeclaredincomeof Rs.36,00,313. 6. The Assessee filed a return of income on 30"" September2008 for AY2008-09whichwas processedunderSection143(1)ofthe Act. The returnedincomewas Rs.1,14,96,331. 7. The Assesseefiledareturnon 29"' September2009 for AY 2009-10.Thiswas pickedup for scrutinyand an assessmentorderwas passedby the AOW.P.(C)Nos. 924/2014,1045/2024,3077/2015&3078/2015j on 26 Aprilth 2011. As againstthe declaredincome ofRs.2,10,82,780,theincomewas assessedatRs.2,19,53,505. 8. On 25March 2013, the DCIT issued a notice to the Assessee under-Section148 ofthe Acttothe assessmentorderfor AY 2006 seeking reopen07. The Petitionerreplied by a letterdated 29''^ April 2013 statingthat theoriginal return filed on 31'^ October 2006 should be treated as returnpursuant to the said notice. 9. By aletterdated 17"' September2013, the AO reproducedthe reasonsfor reopeningofthe assessment,the relevantportionofwhichreadas under: 7. The Assesseefiledareturnon 29"' September2009 for AY 2009-10.Thiswas pickedup for scrutinyand an assessmentorderwas passedby the AOW.P.(C)Nos. 924/2014,1045/2024,3077/2015&3078/2015j on 26 Aprilth 2011. As againstthe declaredincome ofRs.2,10,82,780,theincomewas assessedatRs.2,19,53,505. 8. On 25March 2013, the DCIT issued a notice to the Assessee under-Section148 ofthe Acttothe assessmentorderfor AY 2006 seeking reopen07. The Petitionerreplied by a letterdated 29''^ April 2013 statingthat theoriginal return filed on 31'^ October 2006 should be treated as returnpursuant to the said notice. 9. By aletterdated 17"' September2013, the AO reproducedthe reasonsfor reopeningofthe assessment,the relevantportionofwhichreadas under: "The assessee is a Doctor by professionand derived incomefrom proprietarybusiness from M/s. Park Hospital and M/s.Sunil Hospital & Nursing. The assessee filed its return ofincome on 31.10.2006declaringthe income of Rs.12,35,268/-.Onthebasis of information gathered while scrutinyproceedingsu/s. 143(3)for A. Y. 2010-11 and as per para 11(a)of Tax Audit Report u/s. 44AB dated 28.10.2006 of theassessee (M/s. Park Hospital and Sunil Hospital and NursingHome), the assessee is regularly following mixed system ofaccounting.As per section 145 of the I.T.Act, 1961, income under the head and of business orchargeable 'profits gainsprofession'shall be computedin accordancewith eithercash ormercantile system of accounting regularly employed by theassessee.XXX the cash basis of orollowing accounting,unpaid expensesorforare not allowedasexpensespayable provision expensesde^ctibleexpenditure.Since, there is an outstandingbalanceofRs.5,97,750/-and Rs.4,12,215/-in the Sundrycreditorsandamounts payable respectivelyin M/s. Park Hospital and M/s.Sunil NursingHome respectivelyduringthe F.Y 2005-06,thesame are not an allowableexpenditureunder Cash system ofW.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015 ^ accounting. Following the mercantile system of accounting,bills raisedand accruedincomehas to be shown as taxableincome. Since, the assessee is not showing any debtors orreceivablesin the balancesheet,accruedincomeduringthe F.Y2005-06 has escaped from the assessment. The case has been completed u/s. 143(3) on 22.12.2008assessing the total income at Rs.14,40,230/-. The assesseeneither at the time of assessment nor while filing the IncomeTax Return disclosed the above mentioned facts. Therefore, theincome chargeableto tax has escaped assessment by reasons ofthe failure on the part of the assessee to disclose flilly and trulyall material facts necessary for his assessment. In view of above facts, I have reason to believe that the assesseehas income which has escaped from assessment and fit case toissue notice u/s 148 of the I.T Act, 1961." 10. Withinthree days of the,earliernotice,i.e., on 28^*^ March2013, anothernotice under Section 148 of the Act was issued by the DCIT seeking toreopen the assessment for AY 2008-09. The same reasons, as extractedhereinbefore, were given to the Assessee for the reopening of the saidassessmentfor AY 2008-09. 11. As far as AY 2007-08 is concerned, the notice under Section 148 of theAct was issued by the Assistant Commissionerof Income Tax ('ACIT'),Circle 37(1) on 5^*^ March 2014. The reasons conveyedto the Assesseebythe letter dated 9'^ October 2014 were more or less similar to the abovereasons. It was stated further as under: "During the assessment proceedings for A.Y. 2010-11, theassessee submitted in his reply on 14.03.2013 that he has beenfollowing cash system of accounting until F.Y 2008-09 andshiftedoverto mercantilesystemof accountingfor F. Y. 2009- fV.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015 10. Assessee during the assessmentproceedingsof the A.Y.2007-08 never submitted that he had been cash followingsystem of accounting. It was only during the assessmentproceedings of A.Y. 2010-11 that the assessee submitted thisfact. "During the assessment proceedings for A.Y. 2010-11, theassessee submitted in his reply on 14.03.2013 that he has beenfollowing cash system of accounting until F.Y 2008-09 andshiftedoverto mercantilesystemof accountingfor F. Y. 2009- fV.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015 10. Assessee during the assessmentproceedingsof the A.Y.2007-08 never submitted that he had been cash followingsystem of accounting. It was only during the assessmentproceedings of A.Y. 2010-11 that the assessee submitted thisfact. Followingthe cash basis of accounting,sundry creditors andare not allowedas deductibleInexpensespayableexpenditure.the balancesheetofParkHospitaland SunilNursingHome, thefollowingsundrycreditorsand expensespayableare appearing:1.Park Hospital31.03.2007Amount As, Sundry creditors and amounts/expensespayable are notallowedto be claimedas expenditureunder the cash systemofaccounting. Accordingly, Rs. 30,15,907/- is not allowable asexpenditure, thus,Rs.30,15,907/- hasescapedfromassessment." 12. ForAY 2009-10,the noticewas issuedtwo days later,i.e., on 7^^ March701A, again by the ACIT where the reasons were identicalfor the reasonsfor AY 2007-08. 13. The Assesseesto theofthe above assessmentwere objection reopeningnegativedby orderspassedby the AO on 13^^ December2013 as far as AYs2006-07and 2008-09were concernedand by ordersdated 1March 2015W.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015Page6of11 14. While directingnotice to be issued in W.P. (C) No. 924 and 1045 of2014 (for AYs 2006-07 and 2008-09) on 7^*^ February 2014, the Courtrestrained further proceedingspursuant to the impugned notices. Similarorders were passed at the time of issuance of notices in the other twopetitionsW.P. (C) Nos. 3077 and 3078 of2015(for AYs 2007-08and 2009-10). 15. The Court has heard the submissions of Mr. Salil Kapoor, learnedcounsel for the Petitioner and Mr. Rahul Chaudhary, learned SeniorStanding counsel for the Revenue. 16. The main reason for the reopeningof the assessmentis admittedlytheletter given by the Assessee while the assessment for AY 2010-11 was underscrutiny.It is statedthat inthe reply dated 14"" March2013 addressedto theDCIT in replyto the noticedated 8^^ March2013, the Assesseevolunteeredthat "we have followedthe cash systemof accountinguntil FY2008-09andshiftedover to mercantilesystemof accountingfor FY 2009-10(AY 2010-11). The same has been confirmedby our CharteredAccountantin the taxaudit report as well as the confirmation letter dated 01.10.2012". 17. The reasons furnished to the Assessee for the reopening of theassessmentfurther show that consequentupon the said disclosure,the AOcame to the conclusion that the balances in creditors were not sundryallowableexpenditure.For AY 2006-07,it was concludedthat the Assesseewas not showing any details of receipts and, therefore,the above accruedW.P.(C) Nos. 924/2014,1045/2014,3077/2015&3078/2015Page7of11 income, being the outstanding balance shown as sundry creditors hasescapedassessmentand would requireto be added back. It is stated that theescapementof income was on account of the failure on the part of theAssessee to "disclose fully and truly and material facts necessary forassessment". 17. The reasons furnished to the Assessee for the reopening of theassessmentfurther show that consequentupon the said disclosure,the AOcame to the conclusion that the balances in creditors were not sundryallowableexpenditure.For AY 2006-07,it was concludedthat the Assesseewas not showing any details of receipts and, therefore,the above accruedW.P.(C) Nos. 924/2014,1045/2014,3077/2015&3078/2015Page7of11 income, being the outstanding balance shown as sundry creditors hasescapedassessmentand would requireto be added back. It is stated that theescapementof income was on account of the failure on the part of theAssessee to "disclose fully and truly and material facts necessary forassessment". 18. As far as AY 2006-07is concerned,it is significantthat the assessmentorder dated 22"^* December2008 itselfnotes against column 10 as under"method of accounting: mercantile". Further in the objections to thereopening of assessment, the Assessee pointed out that all relevantparticularsfor AY 2006-07 were duly furnished before the AO; that therewere no creditorsand the amount due was sundryoutstanding only againstexpenses payable. It was stated that since the mercantile system ofaccounting was followed, the liability against the expenses payable wasaccountedfor in the books. Sincethewas notcreditto hospital allowing any there was no debtor in the books. These factors werepatient, appearingexamined by the AO during the original assessmentproceedingsand thebooksofaccountswere alsoIt wasout thatthe mercantile produced. pointedsystemofaccountingwas being followedby the Assesseenot only duringAY 2006-07 but the earlierand subsequentyears as well. Counsel for theAssessee has produced before the Court the assessmentorder dated 17^*^November2006 for AY 2004-05whichshowsthatthe methodofaccountingin the saidAY was 'mercantile'.Itwasthatthe word 'mixed'was explainedinadvertentlymentionedin the audit reportunder Section44AB ofthe Actbut actually it was only the mercantilesystem which was followed. Theauditor had issued a clarification in this regard. This is specificallyfV.P.(QNos. 924/2014,1045/2014,3077/2015&3078/2015p^ge8of11 ^ ^ ^ ,||i mentioned in the objections filed by the Assessee in its letter dated 21^'October 2013. This letter dated 1^' December 2012 of the auditor states "inthis audit reportby clericalmistakethe method of accountingis mentionedas 'mixed' but it is on mercantilesystembasis and insteadof mixedmethodit should be treated as mercantile basis". 19. Similar objectionswere also filed as regards the notices under Section148 of the Act issuedfor the otherthree AYs. As regardsAYs 2007-08and2009-10,in its objectionsthe Assesseein the letterdated O'*" December2014pointedoutthatthe letterdated 14^*^March2013 was writtenby the Assesseeunder some misconceptionas he "does not understand as what is themercantileor cash basedaccounting."It was furtherstated: "Firstof ail, thisletter was written by the assessee in some misconceptionas he does notunderstandas to what is the mercantileor cash basis of accounting.He is alayman as regards to accounting systems, records, policies etc. He is adoctor by professionand does not have accountingknowledge.This letterwas writtenby him withoutunderstandingthe meaningof it. Therefore,nocognizanceshouldbe takenofit as the contentsofthis letterare contrarytothe facts on record." 20. In a, furtherletterdated 9^'' March 2015, the Assesseepointedout thatifthe cash systemwas to be followedfor AYs 2006-07to 2010-11,the overallimpact would be 'nil' and there would be no escapementof income. Thewas whetherincomewas to be taxedin the first or theonlycontroversyyearnextyear and overallitwouldbe tax neutral.Therewas also no revenuelossas the maximumslab oftax rate in all the AYs was the same, i.e., 30%. It JV.P.(QNos. 924/2014,1045/2014,3077/2015&3078/2015 Page9of11 was further pointed out that for AY 2009-10 "by changingthe method ascash basis, the assessed income would be reduced". 20. In a, furtherletterdated 9^'' March 2015, the Assesseepointedout thatifthe cash systemwas to be followedfor AYs 2006-07to 2010-11,the overallimpact would be 'nil' and there would be no escapementof income. Thewas whetherincomewas to be taxedin the first or theonlycontroversyyearnextyear and overallitwouldbe tax neutral.Therewas also no revenuelossas the maximumslab oftax rate in all the AYs was the same, i.e., 30%. It JV.P.(QNos. 924/2014,1045/2014,3077/2015&3078/2015 Page9of11 was further pointed out that for AY 2009-10 "by changingthe method ascash basis, the assessed income would be reduced". 21. The Court finds that none ofthe above objectionshave been adequatelydealtwith bytheAO whilerejectingthe objections. 22. Duringthe courseof today's hearing,apartfrom the mistakemade in theaudit report by mentioningthe system of accountingof the Assessee as'mixed' and the letter issued by the Assessee himself, no other 'tangiblematerial' was cited to justify the reopeningof assessmentfor AY 2006-07and 2007-08,the two years for which the reopeningwas beyondthe periodof four The reasonswere the same reasonsfor the years.providedsuppliedreopeningof the assessmentfor AYs 2008-09and 2009-10althoughfor AY2008-09the earlierassessmentwas completedunder Section 143 (1) of theAct. The fact of the matter was that the reason for the of the reopeningassessmentwas a mistakenfactual premisethat the Assessee,had changedthe system of accountingfrom the mercantileto the cash system. It wasmore than adequatelyexplainedby the Assesseethat this was an inadvertenterror. The Assesseehas convincinglyshown that he has consistentlybeenfollowingthe mercantilesystemofaccountingnot only for AYs in questionbut for the earlier and later AYs as well. 23. Since the action of the Revenue was based on a erroneous factuallypremise,the Court is ofthe view that the reopeningofthe assessmentsforthe said AYs is not sustainablein law. The Court is also satisfiedthat therequirementof the law, as explained by the Court in CommissionerofIncomeTax. v. KelvinatorofIndiaLimited(2010)320ITR561 (SC), andW.P.(C)Nos. 924/2014,1045/2014,3077/2015&3078/2015pagewof11 reiteratedinthe laterdecisions,has not been fulfilledinthe presentcase. 24. Accordingly the impugned notices under Section 148 of the Act dated25thMarch2013 (forAY 2006-07),28thMarch2013 (forAY 2008-09),5thMarch 2014 (for AY 2007-08)and 7th March 2014 (for AY 2009-10)andthe corresponding orders dated 13th December 2013 and 11th March 2015rejecting the objections of the Assessee to the said notices, are herebyquashed. 25. The writ petitions are allowed but in the circumstances with no order asto costs.The pendingapplicationsare also disposedof. S. MURALIDHAR,J MARCH 03, 2016dn VIBHU BAKHRU, J W.P.(C) Nos. 924/2014,1045/2014,3077/2015&3078/2015