Itxa/692/2018 Of Pr. Commissioner Of Income Tax-13, Mumbai v. Nesco Ltd

Judgment-ITXA 692 OF 2018.odt IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 692 OF 2018 Pr. Commissioner of Income Tax-13Mumbai, Aaykar Bhavan,M. K. Road, Mumbai-400 020. V/s.NESCO Ltd.Nesco Estate, Western Express Highway,Goregaon (E), PAN ...Appellant ...Respondent --------- Mr. Akhileshwar Sharma , Advocate for Appellant.Mr. Satish Mody with Ms. Aasifa Khan, Advocate for Respondent. ------- CORAM :DHIRAJ SINGH THAKUR &ABHAY AHUJA, JJ.29[[th]] JULY, 2022 RESERVED ON :29[[th]] JULY, 2022 PRONOUNCED ON : 21[st] OCTOBER, 2022 JUDGMENT : (PER ABHAY AHUJA, J) 1.This is an Appeal filed by the Principal Commissioner of IncomeTax- 13, Mumbai under Section 260-A of the Income Tax Act, 1961 (“theAct”) challenging the order dated 22[nd] March, 2017 passed by the IncomeTax Appellate Tribunal, Mumbai (“ITAT”) dismissing the Appeal filed bythe Revenue. 2.The Respondent-Company is an assessee under the provisions of the Act and the relevant assessment year is 2008-2009. 3.The Respondent-Company had filed its return of income for therelevant assessment year on 6[th] October, 2008 declaring a total income ofRs.46,33,63,270/-, which was processed under Section 143(1) of the Act.Thereafter there was a scrutiny assessment. The assessment wascompleted under Section 143 (3) of the Act on 27[th] December, 2010assessing the total income at Rs. 46,52,72,576/-. 4.The case of the assessee was subsequently re-opened pursuant to issuance of notice under Section 148 of the Act dated 28[th] March, 2013 i.e. within four years for the following reasons : “Under the provisions of the Income Tax Act, 1961 any provision made in the books of contingent liability is notallowable as expenses while computing income under the headbusiness or profession. In this case the assessee company filed its return of income forthe A. Y. 2008-09 on 06.10.2008 declaring income of Rs.46,83,63,270/-. The assessment has been completed afterscrutiny on 27.12.2010 by computing income of Rs.46,52,72,576/-. On perusal of records it was observed that the assessee companydebited Rs. 6,50,00,000/- as claim for compensationpaid/provided. Further it was stated in para no. 15(a) schedule13 to notes forming part of the accounts that provision forcompensation pending settlement as on 31.03.2008 was Rs.131000000/-(including the PY 31.03.2008). However, theprovision made in the accounts is remained to be added back to Judgment-ITXA 692 OF 2018.odt the total income. In view of the above facts, I have reason to believe that incomeof Rs. 6,50,00,000/- chargeable to tax has escaped assessmentwithin the meaning of section 147 of the Income Tax Act,1961.” 5. Response came to be filed by the assessee and after receiving the reasons the assessee objected to the re-opening of the assessmentwhich was disposed by an order dated 18[th] November, 2013. 6.Thereafter, the Assessing Officer acting under the provisions ofSection 143(3) read with Section 147 of the Act passed an assessmentorder making dis-allowance of Rs. 6,50,00,000/- on account of the claimof compensation provided for by the Respondent-Company in its books.The Assessing Officer observed that the assessee/Respondent-Companyhad debited an amount of Rs. 6,50,00,000/- towards the claim forcompensation paid/provided to the profit and loss account (P&L Account).He noted that on perusal of notes to account, it was seen that theprovision for compensation pending settlement as on the closing date ofthe financial year was at Rs. 13,10,00,000/-, which was not added back tothe total income. The Assessing Officer observed that the provisioningwas purely contingent in nature depending upon the happening or nothappening of an event and that this provisioning could not therefore be treated as expenditure for the year under consideration. The AssessingOfficer was of the view that allowing such provisions from the income ofthe assessee would give a distorted picture of P&L Account, which wasagainst the accounting principles and the scheme of the Act. Observingthat the assessee had made provision for expenses, which were notcrystallized and in view of the fact that such provision had been reversedby the assessee in the next financial year, he came to a conclusion that theprovisioning was not required to be made. He observed that such an actindicated that the provisions have been made to create notionalloss/reduce the profits. Holding that since the assessee follows mercantilesystem of accounting the expenses accrued are to be booked but theexpenses which are not accrued cannot be booked and that such aprovision made in the books cannot be allowed as deduction under theAct, the Assessing Officer rejected/disallowed the amount of Rs.6,50,00,000/- and added it back to the total income. 7.Aggrieved by the same, the assessee filed an Appeal before theCommissioner of Income Tax (Appeals) (“CIT(A)”), challenging the re-opening under Section 147 of the Act as well as the dis-allowance of theclaim of compensation of Rs. 6,50,00,000/- . 8. The CIT(A) after considering the submissions made on behalf of theassessee as well as the Revenue held that since the initiation of theproceedings was based on change of opinion, the notice for re-openingunder Section 148 could not be held to be validly issued, as there was nonew, fresh tangible material or any new information which could suggestescapement of income as the issue under consideration was well withinthe knowledge of the original Assessing Officer at the time of the scrutinyassessment. With respect to the dis-allowance of the claim ofcompensation of Rs. 6,50,00,000/-, it was observed that the dis-allowancewas not made on any sound ground or with any legal authority and theCIT(A) went on to delete the dis-allowance of expenditure of the saidamount. 9.Aggrieved by the said order, the Revenue filed an Appeal before theITAT. The ITAT confirmed the order of the CIT(A) holding that since therewas no fresh tangible material in the possession of the Assessing Officer onthe basis of which a belief could be formed for escapement of income, there-opening notice was bad in law. It was also observed by the ITAT thatsince the impugned issue was examined by the A.O., in view of the queryasked by him, which was properly replied with proper details after whichthe original assessment order under Section 143(3) came to be passed Judgment-ITXA 692 OF 2018.odt accepting the impugned claim, the Assessing Officer did not have the shield of Explanation-1 to Section 147 to justify the re-opening which was done without there being any fresh tangible material in the possession ofthe Assessing Officer. The above findings of fact have not beencontroverted by the Revenue. 10. With respect to the issue on merits, the ITAT has upheld the validityof claim made by the assessee with respect to the compensation of Rs. 6,50,00,000/- confirming the order of the CIT(A). 11. Aggrieved by the order of the Tribunal upholding the order of the CIT(A) on re-opening as well as on merits, the Revenue has filed this Appeal proposing the following questions of law:- “A. Whether on the facts and in the circumstances of the caseand in law, the Hon’ble ITAT was correct in quashing the noticeissued u/s. 148 when provisions for issue of notice wereapplicable and reasons for re-opening was recorded by theAssessing Officer.and in law, the Hon’ble ITAT was correct in quashing the noticeissued u/s. 148 when provisions for issue of notice wereapplicable and reasons for re-opening was recorded by theAssessing Officer. 6,50,00,000/- confirming the order of the CIT(A). 11. Aggrieved by the order of the Tribunal upholding the order of the CIT(A) on re-opening as well as on merits, the Revenue has filed this Appeal proposing the following questions of law:- “A. Whether on the facts and in the circumstances of the caseand in law, the Hon’ble ITAT was correct in quashing the noticeissued u/s. 148 when provisions for issue of notice wereapplicable and reasons for re-opening was recorded by theAssessing Officer.and in law, the Hon’ble ITAT was correct in quashing the noticeissued u/s. 148 when provisions for issue of notice wereapplicable and reasons for re-opening was recorded by theAssessing Officer. B. Whether on the facts and in the circumstances of the caseand in law, the Hon’ble ITAT was right in not appreciating thefact that income has escaped assessment within the meaning ofsub-clause (a) to Explanation 2 of section 147 of the Income-tax Act, 1961?and in law, the Hon’ble ITAT was right in not appreciating thefact that income has escaped assessment within the meaning ofsub-clause (a) to Explanation 2 of section 147 of the Income-tax Act, 1961? C. Whether on the facts and in the circumstances of the case, the Hon’ble ITAT erred in holding that the reassessmentproceeding u/s. 147/148 of the Income-tax Act, 1961 is bad inlaw, by holding it to be based on a change of opinion withoutappreciating the fact that no informed decision was taken bythe A.O. due to failure on part of the assessee to disclose trulyproceeding u/s. 147/148 of the Income-tax Act, 1961 is bad inlaw, by holding it to be based on a change of opinion withoutappreciating the fact that no informed decision was taken bythe A.O. due to failure on part of the assessee to disclose truly and fully all material facts for making the assessment? D. Whether on the facts and circumstances of the case and inlaw, the Hon’ble ITAT was justified in allowing thecompensation of Rs. 6.50 crores holding that the same to be anascertained liability, without appreciating the fact that the samewas only a provision and allowing a provision from the incomeof the assessee will give a distorted picture of the Profit andLoss account of the assessee?” 12. It is noted from the concurrent factual findings as recorded in theorders of the CIT(A) and the Tribunal that the amount of claim ofcompensation of Rs.6,50,00,000/- comprises of provision for payment ofcompensation by the assessee with respect to the disputes with MacedonIndo Austrian Ventures Pvt. Ltd., Western Railway, Mumbai and ShivangiCrafts Ltd., Kashipur. 13. Pursuant to supply of machines by the Assessee Company toMacedon Indo Austrian Ventures Pvt. Ltd. which consisted of machineswith manufacturing defects, production suffered leading to disputesbetween the assessee and the Austrian company. A complaint came to befiled by the Austrian company against the assessee with the MRTPCommission, New Delhi. It is to provision for payment of compensation toMacedon Indo Austrian Ventures Pvt. Ltd. that a provision of Rs.4 croreswas made by the assessee in the books of accounts in the previous yearrelating to the assessment year 2008-09; A provision for a compensation of Rs.2.02 crores (with chargeable interest) was shown in the name ofWestern Railway, Mumbai. A provision for compensation of Rs.49.50 lacs(with interest) was shown in the name of Shivangi Crafts Ltd. on theground that the assessee had not manufactured and supplied textilemachinery inspite of accepting the order dated 19[th] October, 1997 andreceipt of advance of Rs. 20 lacs. Pursuant to a litigation filed in the HighCourt of Bombay, the assessee was under a obligation to make theprovision of actual liability. 14. It is recorded that the actual working has been given by SeniorLegal Manager vide his letter dated 30[th] March, 2008 and that the entireamount of Rs. 6,50,00,000/- has been found to be based on actualoccurrence of financial incidence purely related to business activities,which remains uncontroverted by the Revenue. 14. It is recorded that the actual working has been given by SeniorLegal Manager vide his letter dated 30[th] March, 2008 and that the entireamount of Rs. 6,50,00,000/- has been found to be based on actualoccurrence of financial incidence purely related to business activities,which remains uncontroverted by the Revenue. 15. When the assessee’s case was taken up for scrutiny, during theassessment proceedings under Section 143(3) of the Act, the aforesaidfacts were considered and have been relied upon in the order of theCIT(A) and the Tribunal. It is recorded that the details about the amountof compensation debited in the P & L Account for the aggregate amount ofRs.6,50,00,000/- is found to be reflected in the accounts. It is alsorecorded that the assessee has submitted party-wise details giving justification for allowability of compensation with respect to each partywhich was shown in the subsequent year. That the amount of compensationis recorded to be paid as and when settled by the Civil Courts and theamount not paid was returned back as part of other income. These factualfindings stand undisputed and uncontroverted by the Revenue. Theworking referred to in the CIT(A) order has been found to be based onactual occurrence of financial incidence related to business activities of theassessee. These are concurrent findings of fact by the CIT(A) and theTribunal. No contrary fact has been brought to our notice by the Revenue.It would therefore not be correct to say that the provisioning could not betreated as expenditure. The Assessing Officer could not have disallowedthe claim of compensation of Rs.6,50,00,000/-. The CIT(A) has rightlydeleted the disallowance of the claim of compensation of Rs.6,50,00,000/- which has been confirmed by the Tribunal. 16. Further, it is also recorded in the Tribunal order that the AssessingOfficer before recording the reasons for reopening has made reference to thesame documents/material which were also on the record of the AssessingOfficer in the original assessment proceedings under Section 143(3). We,therefore, observe that there does not appear to be any fresh tangiblematerial that has come into the possession of the Assessing Officer before Judgment-ITXA 692 OF 2018.odt recording the reasons for re-opening the assessment. Even in the recordedreasons, the Assessing Officer clearly states that his observations are based“on a perusal of records” but no fresh or new tangible material has beenreferred to or brought on record. 17. The re-opening is within a period of four years from the end of therelevant assessment year. Therefore, it is important that the officer re-opening a assessment has reason to believe based on tangible materialthat income has escaped assessment. What we observe from the aforesaidfacts is that the dis-allowance of the claim of Rs. 6,50,00,000/- on accountof compensation is based on record that was already with the AssessingOfficer at the time of the proceedings under Section 143 (3) of the Act.There is no new or fresh tangible material that has been brought onrecord. This appears to be an attempt to view the same material from adifferent angle of perception. It is nothing but a case of change of opinion,which cannot be permitted. We also agree with the Tribunal that since theimpugned issue was examined by the A.O. on a query raised by him andwhich was replied to with details during the original scrutiny proceedings,Explanation 1 to Section 147 would not be applicable in the facts of thecase. NIKITAYOGESHGADGILDigitally signed byNIKITA YOGESHGADGILDate: 2022.10.2713:04:29 +0530 18. In view of the above discussion, we do not find any error orperversity in the order of the Tribunal. The Appeal does not raise anysubstantial question of law and is therefore, dismissed. No costs. (ABHAY AHUJA, J.) (DHIRAJ SINGH THAKUR J.)