Patel v. Or His Successors To Office

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/SPECIAL CIVIL APPLICATION NO. 22510 of 2019 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 1Whether Reporters of Local Papers may be allowedto see the judgment ?2To be referred to the Reporter or not ?3Whether their Lordships wish to see the fair copyof the judgment ?4Whether this case involves a substantial questionof law as to the interpretation of the Constitutionof India or any order made thereunder ? ========================================================== SURBHI ASSOCIATES THROUGH PARTNER SURESHBHAI DAHYABHAI PATEL VersusOR HIS SUCCESSORS TO OFFICE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE GANDHINAGAR ==========================================================Appearance:MS NUPUR D SHAH(10233) for the Petitioner(s) No. 1MR MR BHATT SENIOR ADVOCATE WITH MR KARAN SANGHANI FOR M R BHATT & CO.(5953) for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIAandHONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 26/07/2022 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned advocate Mr. Nupur D. Shah forthe petitioner and learned Senior AdvocateMr. M.R. Bhatt with learned advocate Mr.Karan Sanghani for M.R. Bhatt and Co. for therespondent. 2.Having regard to the controversy involved inthe present case which lies in a very narrow compass, with the consent of the learnedadvocates for the respective parties, thematter is taken up for final hearing. 3.Rule returnable forthwith. Learned advocateMr. Karan Sanghani waives service of noticeof rule on behalf of the respondent. 4.By this petition under Article 226 of theConstitution of India, the petitioner haschallenged the notice dated 28.03.2021 issued under section 148 of the Income Tax Act, 1961(For short “the Act”) for reopening of theassessment proceedings for the AssessmentYear 2012-2013 along with order dated22.11.2019 disposing of the objections raisedby the petitioner 5.Brief facts of the case are as under : 5.1)The petitioner is a partnership firm and is engaged in construction business,developing real estate and housing project. 5.2)The petitioner assessee filed itsoriginal return of income for the AssessmentYear 2012-2013 through electronic mode on26.09.2012 declaring total income ofRs.57,68,130/-. 5.3)Case of the petitioner was taken for scrutiny assessment and respondent issued notices under section 142(1) of the Act on6.08.2014, 23.09,2014, 15.12.2014 to which the petitioner submitted its reply on22.12.2014,03.01.2015,19.01.2015,02.02.2015, 18.02.2015 and 02.03.2015. 5.4) The respondent issued yet another notice under section 142(1) of the Act on20.03.2015 to which the petitioner replied byits letter dated 25.03.2015. 5.5)The Assessing Officer passed theassessment order under section 143(3) of theAct on 30.03.2015 accepting and determiningtotalincomeoftheassesseeatRs.57,68,130/-. 5.6)The petitioner thereafter, received notice under section 148 dated 28.03.2019 forreopening the assessment. 5.7)The petitioner submitted its replydated 17.04.2019 challenging the validity ofthe notice issued under section 148 of theAct for reopening the assessment. 5.8)The petitioner company filed its return of income under section 148 of the Acton 27.04.2019 and submitted that same beforethe respondent vide letter dated 29.04.2019. 5.9)The respondent thereafter issuednotice under section 143(2) of the Act on24.05.2019 and notice under section 142(1) ofthe Act on 31.05.2019. 5.10)The petitioner company requestedfor copy of reasons recorded by letters dated28.06.2019 and 27.08.2019. 5.11)The respondent addressed a letterdated 30.08.2019 stating that copy of the 5.6)The petitioner thereafter, received notice under section 148 dated 28.03.2019 forreopening the assessment. 5.7)The petitioner submitted its replydated 17.04.2019 challenging the validity ofthe notice issued under section 148 of theAct for reopening the assessment. 5.8)The petitioner company filed its return of income under section 148 of the Acton 27.04.2019 and submitted that same beforethe respondent vide letter dated 29.04.2019. 5.9)The respondent thereafter issuednotice under section 143(2) of the Act on24.05.2019 and notice under section 142(1) ofthe Act on 31.05.2019. 5.10)The petitioner company requestedfor copy of reasons recorded by letters dated28.06.2019 and 27.08.2019. 5.11)The respondent addressed a letterdated 30.08.2019 stating that copy of the reasons have already been provided to thepetitioner. 5.12)The petitioner addressed a letterdated 28.09.2019 informing the respondentthat the petitioner has still not receivedthe reasons recorded by the respondent whichwas duly verified by the petitioner’s onlineportal. 5.13)The respondent thereafter providedthe reasons recorded by the Assessing Officerfor reopening of assessment on 11.10.2019.The reasons recorded by the Assessing Officerfor reopening the assessment under section147 of the Act read as under : “Reasons for reopening of the assessmentin the case of Surbhi Associates forA.Y. 2012-13 1 Brief details of the Assessee:Assessee is a firm engaged in realestate development. Assessee filed its return of income for AY 2012-13 on28.09.2012 declaring income of Rs.5768130. The same was assessed u/s143(3) vide order dated 30.03.2015.Assessee is following percentage ofcompletion method for recognition ofrevenue. 2. Brief details of informationcollected/received by the AO : During the year under consideration,assessee has shown value of workinprogress at Rs. 2,64,76,389 as on31.03.2012. It was however noticed thatvalue of work in progress as on31.03.2012 was Rs. 3,40,62,303. Theassessee reduced the cost of land of Rs.75,85,919 from this amount and resultantvalue of Rs. 2,64,76,384 was accountedin P/L and balance sheet. As revisedguidance note issued by ICAI nowprohibits reduction of cost of land forWIP under PCM, the same should not havebeen reduced from the value of work inprogress. 3.Analysisofinformationcollected/received: upon analysis of the informationcollected it is seen that the assesseehas wrongly reduced the value of work inprogress by Rs. 75,85,919 by reducingthe cost of land from the work inprogress which is not allowed as per therevised guidance note issued by ICAI. 4. Enquiries made by the AO as sequel toinformation collected/received: A perusal and analysis of theinformation collected material availableshows that income has escaped assessmentand there is no need for furtherenquiries u/s. 133(6) to establish thesame. 5. Finding of the AO: It is found that assessee has committeddefault in reducing the value of work inprogress by Rs 75-89,919 which as perthe revised guidance note issued byAllis prohibited. Therefore, is seenthat income to the tune of Rs. 75,85,919has escaped assessment for the yearunder consideration. 6. Basis of forming reason to believeand details of escapement of Income: From the information collected in thiscase, it is prima facie concluded thatincome amounting to Rs. 75,85,919 hasescaped assessment as the assesseecommitted default in reducing the valueof work in progess by Rs. 75,85,919which is prohibited as per the revisedguidance note issued by ICAI. 7. Basis of forming reason to believeand details of income chargeable to taxin relation to any assets (includingfinancial interest in any entity)located outside India: No information ofassets located outside India isavailable. 6. Basis of forming reason to believeand details of escapement of Income: From the information collected in thiscase, it is prima facie concluded thatincome amounting to Rs. 75,85,919 hasescaped assessment as the assesseecommitted default in reducing the valueof work in progess by Rs. 75,85,919which is prohibited as per the revisedguidance note issued by ICAI. 7. Basis of forming reason to believeand details of income chargeable to taxin relation to any assets (includingfinancial interest in any entity)located outside India: No information ofassets located outside India isavailable. 8. Finding of the AO on true and fulldisclosure of the material factsnecessary for assessment under proviso to section 147: The assessee has not truly and fullydisclosed the facts which is clear fromthe instance that it has wrongly reducedthe value of work in progess by reducedthe cost of land which was not allowedas per the revised guidance note issuedby ICAI. Therefore, it is evident thatthe facts of the case are covered by theExplanation 1 to section 147 of the Act. 9. Applicability of the provisions ofsection 147/151 to the facts of thecase; In this case a return of income wasfiled for the year under considerationand regular assessment u/s 143(3) wasmade on 30.03.2015. Since, 4 years fromthe end of the relevant year has expiredin this case, the requirements toinitiate proceeding u/s 147 of the Actare reason to believe that income forthe year under consideration has escapedassessment because of failure on thepart of the assessee to disclose fullyand truly all material facts necessaryfor his assessment for the assessmentyear under consideration. It ispertinent to' mention here that reasonsto believe that income has escapedassessmentfortheyearunderconsideration have been recorded inabove paras 2, 3, 5 & 6.1 have carefullyconsidered the assessment recordscontaining the submissions made by theassessee in response various noticesissuedduringtheassessment/re-assessment proceedings and have notedthat the assessee has not fully andtruly disclosed the following material facts necessary for his assessment forthe year under consideration. It is evident from the above facts thatthe assessee had not truly and fullydisclosed material facts necessary forhis assessment for the year underDEPARTMENTconsiderationtherebynecessitating reopening u/s 147 of theAct. It is true that the assessee has filed acopy of annual report and audited P&L A/c and balance sheet along with return ofincomewherevariousinformation/material were disclosed.However, the requisite full and truedisclosure of all material facts:necessary for assessment has not beenmade as noted above. It is pertinent tomention here that even though theassessee has produced books of accounts,annual report, audited P&L A/c andbalance sheet or other evidence asmentioned above, the requisite materialfacts as noted above in the reasons forreopening were embedded in such a mannerthat material evidence could not bediscovered by the AO and could have beendiscoveredwithduediligence,accordingly attracting provisions ofExplanation 1 of section 147 of the Act. It is evident from the above discussionthat in this case, the issues underconsideration were never examined by theAO during the course of regularassessment. It is important to highlighthere that material facts relevant forthe assessment on the issue under may beembedded in annual report audits P&L A/c, balance sheet and books of accountin such manner that it would require duediligence by the AO to extract theseinformation. For forested reasons is nota case of change of opinion by the AO. It is evident from the above discussionthat in this case, the issues underconsideration were never examined by theAO during the course of regularassessment. It is important to highlighthere that material facts relevant forthe assessment on the issue under may beembedded in annual report audits P&L A/c, balance sheet and books of accountin such manner that it would require duediligence by the AO to extract theseinformation. For forested reasons is nota case of change of opinion by the AO. In this case more than four years havelapsed from the end of assessment yearunder consideration. Hence necessarysection to issue notice u/s. 148 hasbeen obtained separately from PrincipalCommissioner of Income Tax as per theprovisions of section 151 of the Act.” 5.14)The respondent thereafter issuednotice under section 142(1) of the Act on15.11.2019 to which the petitioner submittedits reply on 19.11.2019. 5.15)Thereafter, yet another notice undersection 142(1) of the Act was issued on22.11.2019. 5.16)It is the case of the petitionerthat respondent issued the order dated22.11.2019 disposing of the objectionsagainst the reasons recorded despite the petitioner not even having submitted theobjections against the reasons recorded forreopening of the assessment. 5.17)The petitioner thereafter submittedits objections against reopening assessmentvide letter dated 6.12.2019. 5.18)The respondent thereafter issuedshow cause notice dated 11.12.2019 againstthe petitioner. 5.19) Being aggrieved by the action of therespondent, the petitioner has preferred thispetition. 6.Learned advocate Ms. Nupur Shah for the petitioner submitted that during the courseof original assessment proceedings, thepetitioner vide submissions dated 2.2.2015and 18.02.2015 had justified that the petitioner has accounted revenue as per ICAIGuidance note and has calculated WIPaccordingly. It was submitted that the petitioner had explained the WIP of Rs.2,64,76,389/- with regard to the methodologyadopted i.e. real estate guidance notefollowed by the petitioner culminating intothe resultant amount of WIP based on revenuerecognition. It was submitted that the Assessing Officer after verification ofentire details passed an order under section143(3) of the Act wherein no disallowance hasbeen made in respect of the amount of Workin Progress of Rs.2,64,76,389/-. It was further submitted that the respondentauthority is seeking to make an addition foran amount of Rs. 75,85,919/- towards reduction of cost of land on the same set offacts on which the scrutiny assessment wasmade under section 143(3) of the Act. 6.1) Learned advocate Ms. Shah submittedthat the entire assumption of jurisdiction bythe respondent authority is patently bad inlaw inasmuch as the reasons recorded clearlyshow that notice under section 148 of the Acthas been issued on the basis of assessmentproceedings which cannot be the basis forreopening of the assessment under section 147read with section 148 of the Act. It wasfurther submitted that where an assessmentunder section 143(3) of the Act has been madefor the relevant assessment year, no actioncan be taken under section 147 of the Actafter expiry of four years from the end ofthe relevant assessment year unless anyincome chargeable to tax has escapedassessment by reason of failure on part ofthe assessee to disclose fully and truly allmaterial facts necessary for assessment. 6.2) Learned advocate Ms. Shah further submitted that there is no independentbelief/reason to believe of the respondentAssessing Officer for undertaking exercise ofreopening under section 147 of the Act andthe entire reopening seems to be at theinstance of audit department. 6.2) Learned advocate Ms. Shah further submitted that there is no independentbelief/reason to believe of the respondentAssessing Officer for undertaking exercise ofreopening under section 147 of the Act andthe entire reopening seems to be at theinstance of audit department. 6.3) It was further submitted that therevised guidance note issued by ICAI is onlyapplicable to all projects in real estatewhich commenced on or after April 1, 2012whereas the petitioner’s case has beenreopened for Assessment Year 2012-2013relevant to Financial Year 201-2012 ending on31[st] march, 2012 and therefore, the guidancenote is not applicable to the facts of thecase of the petitioner. It was therefore,submitted that the assumption of thejurisdiction by the Assessing Officer toreopen the assessment would amount to changeof opinion. 7.On the other hand learned Senior Advocate Mr.M.R. Bhatt for the Revenue submitted that the petitioner is filed at a pre-mature stageinasmuch as only notice under section 148read with section 147 of the Act and in theevent the petitioner is aggrieved by thereassessment, alternative efficacious remedyis available by way of an appeal before theCIT(Appeals) and thereafter before theTribunal. 7.1) Learned Senior Advocate Mr. Bhattfurther submitted that after the order ofassessment under section 143(3) of the Act,was passed, it was noticed that for the yearunder consideration, the assessee disclosedvalue of work in progress as on 31.3.2012 atRs. 2,64,76,389/- whereas the actual work inprogress was at Rs. 3,40,62,303/-. It wasfurther submitted that the assessee arrived at value of work in progress at Rs. 2.64crores because it deliberately reduce thecost of land of Rs. 75.85 Lakh from the totalamount of work in progress and the revisedguidelines issued by ICAI prohibits thereduction of cost of land from work inprogress. It was therefore, submitted thatthere is reason to believe that incomechargeable to tax has escaped assessment onaccount of failure on part of the assessee todisclose the correct facts and therefore thenotice issued under section 148 of the Act isa valid notice. 8.Considering the submissions made by the learned advocates on both the sides, itappears that the impugned notice undersection 148 of the Act, 1961 is issued onlyon the ground that the assessee has committeddefault in reducing the value of work inprogress by Rs. 75,85,919/- which as per the revised guidance note issued by ICAI isprohibited and therefore, the income to thetune of Rs. 75,85,919/- has escaped assessment for the year under consideration. 9. It is not in dispute that during the courseof original assessment proceedings undersection 143(3) of the Act, 1961, all thedetails were fully and truly disclosed by thepetitioner and there is no escapement of income chargeable to tax on account offailure on part of the assessee to disclosefully and truly all material facts. 10.From the facts on record, it appearsthat during the original assessment proceedings, the Assessing Officer had calledfor details regarding the working of WIP andthe petitioner has explained in detail aboutthe WIP of Rs. 2,64,76,389/- and also the methodology adopted by the petitioner. The Assessing Officer after verification ofentire details passed the order under section143(3) of the Act wherein no disallowance was made in respect of the amount of work inprogress. Thus it appears that the respondentauthority is seeking to make addition ofRs.75,85,919/- towards reduction of cost ofland on the same set of facts on which thescrutiny assessment was made though theassessee has fully and truly disclosed allmaterial facts necessary during the originalassessment proceedings for the relevantassessment year. proceedings, the Assessing Officer had calledfor details regarding the working of WIP andthe petitioner has explained in detail aboutthe WIP of Rs. 2,64,76,389/- and also the methodology adopted by the petitioner. The Assessing Officer after verification ofentire details passed the order under section143(3) of the Act wherein no disallowance was made in respect of the amount of work inprogress. Thus it appears that the respondentauthority is seeking to make addition ofRs.75,85,919/- towards reduction of cost ofland on the same set of facts on which thescrutiny assessment was made though theassessee has fully and truly disclosed allmaterial facts necessary during the originalassessment proceedings for the relevantassessment year. 11.It is therefore, apparent that there ischange of opinion by the Assessing Officer toreopen the assessment for the Assessment Year2012-2013, more particularly, when the issueof value of work in progress as per therevised guidance note issued by ICAI isalready considered during the assessment proceedings under section 143(3) of the Act,1961. The Assessing Officer cannot have anyjurisdiction to issue the notice undersection 148 of the Act, 1961 for reopeningthe assessment for the year underconsideration more particularly, when theassessment is sought to be reopened beyond aperiod of four years as held by the SupremeCourt in case of Commissioner of Income tax v. Kelvinator of India Ltd. reported in2010(2) SCC 723 as under: “2. A short question which arises fordetermination in this batch of civilappeals is, whether the concept of"change of opinion" stands obliteratedwith effect from 1st April, 1989, i.e.,after substitution of Section 147 ofthe Income Tax Act, 1961 by Direct TaxLaws (Amendment) Act, 1987? xxxx 6. On going through the changes, quotedabove, made to Section 147 of the Act,we find that, prior to Direct Tax Laws(Amendment) Act, 1987, re-opening couldbe done under above two conditions andfulfillment of the said conditionsalone conferred jurisdiction on theAssessing Officer to make a backassessment, but in section 147 of the Act [with effect from 1st April, 1989],they are given a go-by and only onecondition has remained, viz., thatwhere the Assessing Officer has reasonto believe that income has escapedassessment, confers jurisdiction to re-open the assessment. Therefore, post-1st April, 1989, power to re-open ismuch wider. However, one needs to givea schematic interpretation to the words"reason to believe" failing which, weare afraid, Section 147 would givearbitrary powers to the AssessingOfficer to re-open assessments on thebasis of "mere change of opinion",which cannot be per se reason to re-open. We must also keep in mind theconceptual difference between power toreview and power to re-assess. TheAssessing Officer has no power toreview; he has the power to re-assess.But re-assessment has to be based onfulfillment of certain pre-conditionand if the concept of "change ofopinion" is removed, as contended onbehalf of the Department, then, in thegarb of re-opening the assessment,review would take place. One must treatthe concept of "change of opinion" asan in-built test to check abuse ofpower by the Assessing Officer. Hence,after 1st April, 1989, AssessingOfficer has power to re-open, providedthere is "tangible material" to come tothe conclusion that there is escapementof income from assessment. Reasons musthave a live link with the formation ofthe belief. Our view gets support fromthe changes made to Section 147 of theAct, as quoted hereinabove. Under theDirect Tax Laws (Amendment) Act, 1987,Parliament not only deleted the words"reason to believe" but also insertedthe word "opinion" in Section 147 of 12. 12. the Act. However, on receipt ofrepresentations from the Companiesagainst omission of the words "reasonto believe", Parliament re-introducedthe said expression and deleted theword "opinion" on the ground that itwould vest arbitrary powers in theAssessing Officer. We quote hereinbelowthe relevant portion of Circular No.549dated 31st October, 1989, which readsas follows: "7.2 Amendment made by theAmending Act, 1989, to reintroducethe expression `reason to believe'in Section 147.--A number ofrepresentationswerereceivedagainst the omission of the words`reason to believe' from Section147 and their substitution by the`opinion'oftheAssessingOfficer. It was pointed out thatthe meaning of the expression,`reason to believe' had beenexplained in a number of courtrulings in the past and was wellsettled and its omission fromsection 147 would give arbitrarypowers to the Assessing Officer toreopen past assessments on merechange of opinion. To allay thesefears, the Amending Act, 1989, hasagain amended section 147 toreintroduce the expression `hasreason to believe' in place of thewords `for reasons to be recordedby him in writing, is of theopinion'. Other provisions of thenew section 147, however, remainthe same." Inviewofforegoingreasons, considering the facts of the case impugnednotice under section 148 of the Act, 1961 isnot tenable in law and is accordingly quashedand set aside and consequentially order dated22.11.2019 disposing of the objections raisedby the petitioner is also quashed and setaside. 13.Rule is made absolute to the aforesaidextent. No order as to costs. (N.V.ANJARIA, J) RAGHUNATH R NAIR (BHARGAV D. KARIA, J)